Annuities to Meet the Needs of Clients

Client’s Financial Objectives

If you sell annuities, you’re well acquainted with the insurable needs and financial objectives they can serve.  Deferred annuities may be appropriate for clients seeking tax-deferred asset accumulation for retirement or other long-term goals, or individuals needing lifetime income starting at some future date.  Many deferred annuities also may have other benefits such as guaranteed or enhanced death benefits or nursing home waivers.

Immediate annuities may be appropriate for clients needing an immediate payment lasting for a certain number of years or for their lifetime.  An annuity may not be appropriate for someone who doesn’t plan to hold on to it for long-term needs.

Many deferred annuity products contain significant surrender or withdrawal charges for several years or are designed to give the value after several years (e.g., at maturity date).  Tax treatment also favors long-term ownership.

Distributions may be subject to income tax and a 10 percent federal income tax early withdrawal penalty on earnings if taken prior to age 59 ½.  Exceptions includes reasons like other than death, disability, and certain periodic distributions based on life expectancy.  It’s likely helpful to help clients consider an annuity as money set aside for financial goals envisioned beyond age 59 ½.

As such, clients should have sufficient income, assets, and financial resources to cover current expenses and foreseeable short and intermediate-term needs.  A client’s participation in a qualified retirement plan may affect their need for non-qualified deferred annuity.  Most people are better off contributing the maximum amount permitted under their qualified retirement plans before considering a non-qualified annuity.  Many states have adopted the National Association of Insurance Commissioners (NAIC) suitability of annuity transactions model regulation.  Three primary requirements to review when recommending annuities are:

  • Recommendations to buy or exchange an annuity must be appropriate
  • Sales of annuities must be supervised to ensure the recommendations are appropriate
  • Records must be maintained

The Need for Annuities

Agents should make recommendations to acquire annuities based upon relevant information obtained from the client including but not limited to:

  • Financial situation
  • Risk tolerance
  • Tax status
  • Investment time horizon
  • Financial goals

Determine the amount of savings they need, or retirement income desired to sustain a standard of living.  You may also consider relevant information such as annual income, net worth, liquidity needs, etc.  Retirees need income from all sources of at least two-thirds of their pre-retirement income to maintain their planned standard of living.  While there is no one formula, below are some questions that clients should consider in determining future financial needs.  If the client refuses to provide some or all of the information you request, then you need to document in the file that the client refused to provide the information.

Acquiring a Qualified Deferred Annuity

Agents who recommend that a client rollover his/her retirement plan or IRA into a qualified deferred annuity are subject to the fiduciary standard set forth in the Department of Labor’s Fiduciary rule.  Agents acting as a fiduciary are required to follow these standards:

  • Place the interest of the client first
  • Make full and fair disclosure to the client of all material facts and when a conflict of interest or potential conflict of interest exist
  • Provide advice that is suitable to the client’s needs, goals, objectives and personal circumstances

To assist the agents in meeting the requirements noted above, The Company policy requires agents to provide clients with the Fixed Indexed Annuity and Fixed Annuity Disclosure Form (discloses all conflicts of interests to the client) and complete the TFN Agent Qualified Recommendation Form (agent documents how the annuity transaction is in the best interest of the client).

Buying a Non-Qualified Deferred Annuity

Here are some questions helpful for clients to ask themselves before buying a non-qualified deferred annuity.

  • Am I buying the annuity primarily for long-term needs (e.g., retirement)?
  • Do I have enough money set aside to cover emergencies and short-term savings needs?
  • Can I afford to delay withdrawals until at least 59 ½?
  • Is deferral of income tax on the annuity’s earnings important to me?
  • Do I expect to be in a lower income tax bracket after retirement?
  • Will I have other funds available to cover important intermediate financial goals, such as a down payment for a home or college tuition?
  • Am I contributing the maximum amount to the qualified retirement plans available to me?
  • When paid out, annuity earnings are taxed as ordinary income, not capital gains. Does this fit my tax strategy?
  • Does it fit my tax strategy that the annuity death benefit is subject to federal income tax as opposed to life insurance policy death benefits, which generally are not? If a client answers “yes” to most of these questions above, it may indicate that a deferred annuity may be an appropriate part of the client’s portfolio and may be worth further review and consideration.

Indexed Annuities and Indexed Life Insurance

“Indexed” Annuity and Indexed Life Insurance products credit non-guaranteed interest rates based on a formula tied to data or an index outside of the contract or policy. Features to remember when you sell indexed products include:

  • While non-guaranteed interest may be credited based on an external index, these products are not “investment” products and may not be sold as such.
  • Gather information such as financial status, tax status, and financial objectives to help determine if an indexed product will meet the client’s financial goals and objectives, but don’t give tax or legal advice.
  • Due, in part, to the unique nature of indexed products, the client must be provided with the required disclosure as required by the product manufacturer. This would describe things such as:
    • Surrender charges and how the cash surrender value is calculated
    • provisions
    • Minimum guaranteed surrender values
    • Annuitization payout options
    • How the market value adjustment (if any) is calculated
    • How interest is calculated and credited
    • Bonus interest and/or premium bonuses
    • Withdrawal Any additional riders
    • How the death benefit is calculated

The client must acknowledge receipt of this disclosure.