Although life insurance producers have traditionally sold life insurance and fixed annuities, increasingly life insurance agents are moving into the financial planning arena and becoming licensed to sell variable annuities, mutual funds, and other securities.
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An annuity is a contract between the buyer and an insurance company, where the buyer pays a premium in return for receiving payments from the insurance company at a later time.
Annuities have long been one of the most commonly used investment vehicles for providing guaranteed income during retirement, but annuities can also be used for other purposes, such as saving for a child’s education or providing income to a surviving spouse and children after the demise of the family provider.
Understanding the Terminology
The annuity owner, usually the annuity’s buyer, is the person who makes decisions regarding the purchase, sale, and payout of the annuity. An annuitant, who is also often the annuity owner, is the person who receives payments from the annuity when it reaches its maturity date. However, a contract can have one or more annuitants, and they don’t necessarily have to be the owners. A beneficiary is the person that the annuitant designates to receive remaining annuity payments (if any) in the event the annuitant dies before collecting the full balance owed to them.
The annuity buyer may have the option of paying installment premiums or a single premium:
- Scheduled premium annuity: A type of installment premium that sets a specific amount as the premium payment to be made at a specified time interval (usually monthly, quarterly, or annually) for a specified amount of time (for example, five or ten or 20 years).
- Flexible premium annuity: A type of installment premium that lets the buyer choose the amount of the premium to pay at each payment interval. Details vary, depending on the annuity contract, but contracts typically require some minimum payments and may also set a maximum.
- Single premium annuity: The buyer makes one lump sum premium payment. An advantage of a single premium annuity is that the full amount of the premium begins earning interest immediately.
Annuities can be immediate or deferred:
- Immediate annuity: Income payments begin within one year after premium payment. This option is useful for people who have a large amount of cash and want to set up steady income payments by buying a single premium annuity.
- Deferred annuity: Income payments start many years after premium payment. This is the option most often pursued by those looking to secure some guaranteed income in their retirement.
Annuities offer various payout options, and the choice is important because it affects the dollar amount of the payments:
- Fixed amount annuity: The annuitant receives a fixed monthly (or other periodic) payment amount until the annuity is used up. If the annuitant dies before receiving the full annuity, a beneficiary receives the remaining payments.
- Fixed period annuity: The annuitant receives fixed payment amounts over a chosen time period, such as ten or 20 years. If the annuitant dies before the end of the time period, a beneficiary receives the remaining payments.
- Lump sum payment: The annuitant receives one lump sum payment from the annuity.
- Lifetime or straight life: The annuitant receives payments until death, with no payments to a beneficiary.
- Life with period certain: The annuitant receives payments for life but there’s a minimum payment period. If the annuitant dies before the end of this period, a beneficiary receives payments for the remainder of the minimum payment period.
- Joint and survivor option: This annuity option provides payments throughout the lifetimes of two people, often a couple. Monthly payment amounts depend on the annuitants’ ages and whether the survivor’s payment is 100 percent of the joint amount or a lesser percentage.
Annuities can be qualified or non-qualified. A tax-qualified annuity is one used to fund a qualified retirement plan, such as an IRA, Keogh plan, 401(k) plan, or SEP (simplified employee pension). Annuity premiums put into a qualified retirement plan are tax-deductible up to the limits allowed by law. The annuity qualifies for tax benefits and is subject to early withdrawal penalties set by Congress.
The tax benefits are that any nondeductible or after-tax amount put into the plan is not subject to income tax when withdrawn, and the earnings on the investment are not taxed until withdrawal. However, all money withdrawn from a qualified annuity before the age of 59-1/2 is subject to a 10 percent tax penalty, in addition to paying the regular income tax, with a few exceptions. Minimum payments from the annuity must begin by age 70-1/2.
A non-qualified annuity is purchased completely with after-tax dollars outside of a qualified retirement plan. Earnings are still tax-deferred. Withdrawals before the age of 59-1/2 incur the 10 percent penalty only on the portion of the withdrawal that represents earnings, not on the principle. Minimum distribution rules do not apply at age 70-1/2.
- Installment-refund: If the annuitant dies before receiving back the original investment in the annuity, the remaining original investment is paid to a beneficiary, but does not include interest earned on the principal.
- Surrender charges: Fees charged for early withdrawals from a deferred annuity. The charge is typically higher in the first year or two and then decreases, ultimately becoming zero after a few years.
Types of Annuities
The three main types of annuities are fixed, variable, and equity-indexed annuities.
With a fixed annuity, the insurance company guarantees the principle, which is the amount paid in incrementally as premiums, in addition to a minimum interest rate. Depending on the earnings of the investments in which the insurance company places the principle, the earnings paid to the buyer can change each year but can never fall below the guaranteed minimum. Insurance companies invest fixed annuity premiums conservatively, often opting for safe and secure investments such as government and corporate bonds.
Unlike fixed annuities, the principle of variable annuities can grow in value or lose value based on the investments made by the annuity. Variable annuities typically offer the buyer a choice of investment options, which can range from conservative to aggressive. Options most commonly include mutual funds that own stocks, money market instruments, and bonds. Some variable annuities offer the long-term stability of a fixed interest account as an investment option, to balance riskier higher-yield investments.
Buyers can choose a combination of available investment vehicles. Most variable annuities let the buyer change investment allocations a specified number of times each year at no charge, but often charge a fee for additional allocation changes.
Both state insurance commissions and the Securities and Exchange Commission (SEC) regulate the sale and management of variable annuities. Every variable annuity comes with a prospectus that contains important information about the annuity contract, including investment options, fees and charges, death benefits, and annuity payout options. This allows investors to make fully informed decisions as they shop the options available to them.
Hybrids of fixed and variable annuities are known as equity-indexed annuities. The rate of return on an indexed annuity is tied to a specific market index, such as the S&P 500 Composite Stock Price Index. However, the annuity also has a guaranteed minimum interest rate. These annuities are considered more risky than fixed annuities, but can provide a greater return, and although less risky than variable annuities, they don’t typically offer the possibility of exceptionally high returns.
Licensing Requirements: Regulatory Bodies and Series Exams
All U.S. states and territories license life insurance agents who sell fixed annuities. Although requirements vary, they typically include taking pre-licensure courses and passing one or more state-specific exams. These courses are available from a variety of sources, but must ultimately be approved the insurance regulatory authority of the licensing state. Contact information for the insurance department of each state and territory is available at the National Association of Insurance Commissioners website.
A licensed life insurance agent can sell life insurance and fixed annuities. Agents who want to sell variable and equity-indexed annuities need to become licensed as a registered representative by taking one of two Financial Industry Regulatory Authority (FINRA) Exams:
- Series 6 exam (Investment Company Products/Variable Contracts Limited Representative)
- Series 7 exam (General Securities Representative)
FINRA regulates most securities firms doing business in the U.S., and all securities professionals associated with a member firm must register with FINRA, including life insurance producers with licenses to sell variable annuities. Passing the Series 6 exam allows individuals to sell mutual funds, variable annuities, and similar products. Passing the Series 7 exam allows individuals to sell those products as well as most other types of securities.
Some states also require passing the Series 63 exam, Uniform Securities Agent State Law Examination, which covers the principles of state securities regulation as defined in the Uniform Securities Act.
The Series 6 exam consists of 100 questions that cover six areas:
- Evaluation of customers
- Marketing, prospecting, and sales presentation
- Opening and servicing customer accounts
- Product information (investment company securities and variable contracts)
- Securities markets, investment securities, and economic factors
- Securities and tax regulation
The Series 7 exam contains 250 questions covering an even broader range of security-related topics including:
- Corporate securities
- Municipal fund securities
- Municipal securities
- Direct participation programs
- Variable contracts
Applying to take a registered representative exam requires the sponsorship of a FINRA-member broker-dealer firm. Usually, the sponsor is an employer. Agents can prepare for the Series 6, 7, or other exams through self-study or by taking courses from a variety of online and offline sources.
After becoming registered representatives, agents must then complete a computer-based training program within 120 days of the second anniversary of the date they received approval as a registered representative. Then, they have to complete this training program every three years. This Regulatory Element Program from FINRA emphasizes regulatory compliance, ethics, and sales practice standards. Broker-dealer firms engage registered reps yearly in Firm Element training that focuses on areas of need as assessed by the firm with regard to sales practices and products.
Education and Degree Options for Life Insurance/Annuity Producers
Many companies and independent agencies prefer to hire college graduates to join their life insurance and annuity sales teams. Graduates with degrees in business, finance, or economics have an advantage as they often have a better mastery of ethical and effective sales skills, a thorough understanding of how the industry works, and knowledge of the technical aspects of insurance policies, annuities, securities, and how financial markets impact the many investment vehicles.
Many colleges now offer courses in insurance and a few even offer bachelor’s degrees specific to insurance. To gain a fuller understanding of how economic and social conditions relate to the insurance and securities industries, courses in accounting, economics, finance, mathematics, business administration, business law, and marketing are useful. From a sales perspective, courses in psychology, sociology, and public speaking can be useful. Insurance producers also need the computer skills necessary to work with insurance and financial software packages.
Certification Options for Life Insurance/Annuity Producers
Life insurance producers can boost their professional status by getting certifications related to insurance and financial planning.
The American College in Bryn Mawr, Pennsylvania, offers a variety of professional insurance and financial certifications. Three particularly relevant to life insurance producers selling annuities are Life Underwriter Training Council Fellow (LUTCF), Chartered Life Underwriter (CLU), and Chartered Financial Consultant (ChFC). Classes to earn these designations are available in a number of formats including self-study, online, and classroom.
The Life Underwriter Training Council Fellow (LUTCF) program combines knowledge of insurance products with basic planning concepts and requires completing an ethics course and five elective courses in topics such as meeting client needs, serving personal markets, annuities, business insurance, long-term care, life insurance products, and investment, retirement, and estate planning.
The Chartered Life Underwriter (CLU) program provides in-depth knowledge on the insurance needs of individuals, business owners, and professionals. The program has five required courses in insurance and financial planning, life insurance law, estate planning, and planning for business owners and professionals. The program also requires completing three electives in topics such as income tax, group benefits, retirement planning, and health insurance.
To receive the CLU designation, applicants must also have three years of full-time business experience within the five years prior to earning the designation and agree to a code of ethics. One year of business experience can be satisfied with an undergraduate or graduate degree from an accredited educational institution. Maintaining the designation requires 30 credits of continuing education every two years.
The Chartered Financial Consultant (ChFC) is a financial planning certification that focuses on the needs of individuals, professionals, and small business owners in areas such as insurance, income tax, investments, retirement planning, and estate planning. This designation requires completing seven required and two elective courses. The ChFC has the same experience, ethics, and continuing education requirements as the CLU.
Employment and Salary Information
Employment statistics provided by the Bureau of Labor Statistics show that insurance agencies and brokerages employ about 51 percent of insurance sales agents, while about 22 percent of agents are self employed. Insurance carriers employ about 21 percent of agents, and a few agents work for banks and securities brokerages.
The BLS expects employment of insurance sales agents to increase by 12 percent in the current ten-year period ending 2018, with the best opportunities for college graduates who have well-developed interpersonal skills, sales ability, and expert knowledge in a variety of insurance and financial services.
Many insurance producers work at least partly on commission, so their earnings potential is tied directly to their sales. As of May 2010, the mean annual salary for all insurance sales agents was $62,520, according to the BLS. The median salary was $46,770, with 50 percent of agents earning between $33,330 and $71,620.