This post is part of a series sponsored by AgentSync.
At the height of the pandemic, increased fear and a greater awareness of mortality drove consumers away from annuities and increased demand for life insurance products. Now, as the world enters another year of post-pandemic living, we’ve seen those fears fade away and be replaced with a renewed interest in investing for guaranteed income after retirement.
The recent increase in consumer interest in annuities is largely driven by the fear of economic uncertainty and the risk of a recession, similar to the 2008 financial crisis. Multiple sources show an increase in annuity sales, and it appears that consumers are particularly interested in buying fixed and fixed-indexed annuities – two of the lower risk options.
With consumers eagerly seeking annuity contracts, many producers feel now is a good time for them to jump on the bandwagon and become licensed to sell annuities. However, the complicated world of annuity means that the licensing requirements are not as simple as they are with other authorities. So read on as we take a deep dive into annuity and break down exactly what a producer* needs to sell these insurance products without any statutory or legal ramifications.
*There is a whole glossary of terms that can be used to describe an insurance professional who specializes in selling annuity products. For consistency and to avoid confusion, we will primarily refer to these individuals as producers.
What is an annuity?
An annuity is a contract between a consumer and an insurer where the consumer (or beneficiary) makes a payment or series of payments in exchange for regular payments from their insurer at a later date. In other words, an annuity offers consumers a guaranteed future retirement income in exchange for a premium paid in advance.
If that definition sounds a little vague, that’s because annuities are difficult to define. This is due to the plethora of different annuity types that exist based on the different ways in which income is built, calculated, credited and paid out. For now, we will discuss three of the most common types of annuity: fixed, variable, and indexed.
What is a fixed annuity?
Often considered “set it and forget it” contracts, fixed annuities pay out a fixed and guaranteed amount. Fixed annuities are perfect for today’s risk-averse consumers because they are not tied to the performance of a stock market index. Buyers do not have to worry about market risk and can calculate their exact minimum income with a fixed annuity. On the downside, should market conditions improve over time, the recipient does not receive a higher payout than their contract states.
What is an indexed annuity?
If you’re taking a step into slightly riskier territory, you have indexed annuities. With this type of annuity, the buyer still receives a guaranteed minimum payout. But unlike fixed annuities, with indexed annuities part of the payout is tied to the performance of a market index. Indexed annuities offer buyers greater potential income, but often come with growth caps.
What is a variable annuity?
Buyers looking for a high-risk, high-reward option have the option of variable annuities. With these types of annuities, income is based solely on a buyer’s investments – usually in mutual funds. The volatility of mutual funds can lead to many account fluctuations based on the performance of the investments a buyer chooses.
What are the advantages and disadvantages of annuities for consumers?
Annuities offer consumers financial security, but their complex nature can be a disadvantage. Recently, talk of economic uncertainty and recession fears have fueled the fire, sending annuity sales soaring to record highs. Many consumers, fearful that their savings and Social Security payments will no longer be enough to see them through retirement, are turning their attention to annuities and the benefits they can provide.
Benefits of annuity for consumers
- Death benefit – Annuity can provide financial security to your loved ones in the event of your death. Depending on the terms of the annuity contract, purchasers may transfer an annuity to one or more designated beneficiaries.
- Tax-deferred growth – Consumers can use pre- or after-tax funds to purchase their annuity contracts and do not have to pay income tax until they start making withdrawals or receiving periodic payments.
- No mandatory withdrawals – Generally speaking, as long as your annuity is not funded with pre-tax money, like an IRA, there is no required minimum distribution when you reach age 73.
Disadvantages of annuity for consumers
The benefits make annuities an attractive financial solution for many. But buying an annuity also comes with some disadvantages, including:
- Complex in nature – Nowadays, there are more annuity choices for consumers than ever before. As annuity types increase, so does a sense of confusion surrounding the complexity of the multiple contract variations.
- Hidden fees – Always read the fine print! While variable annuities are known for their historically high fees, consumers should also be aware of the hidden fees buried deep in even their fixed annuities. Commission fees, issuance fees and penalties can add up quickly and eat up a significant portion of the return.
- Risky – A big factor that makes annuities such an attractive option for consumers is the guaranteed income they can provide. But not all annuities are so predictable. Variable annuities in particular depend on market performance and can be risky for consumers.
For as much confusion as there is when it comes to buying annuities, there can be just as much for those looking to sell them. What types of annuities can producers sell with what type of insurance license, and how do they profit from doing so? Read on for a brief overview of annuities from the producer side.
Who can sell annuities?
Licensed insurance producers who have the necessary credentials to sell life insurance in their state can get started with fixed annuities. But things get a little complicated when it comes to the specific licensing requirements for the different types of annuity contracts.
How do producers profit from selling annuities?
Insurance producers are paid a commission for selling annuities. Typically, that commission is higher than what they can earn selling other insurance products, due to the long-term and complex nature of annuity contracts. With a little research and understanding, agents can sell these high commission products with almost the same amount of work as low commission products but with 5-10 times the payout.
Fixed annuity license requirements
When it comes to selling fixed annuities (including single premium annuities, longevity annuities, fixed rate annuities, qualified longevity annuities and fixed index annuities), we have some good news. The regulatory authorities for these types of annuities are the state departments of insurance and their governing body, the National Association of Insurance Commissioners. Because they don’t require additional oversight, a standard life insurance license issued by your state of residence is enough to get the ball rolling on selling fixed annuities.
Variable Annuity License Requirements
Things get a little more complex when it comes to licensing requirements for selling variable annuities and registered index-linked annuities (RILAs). Because they are classified as securities, these types of annuities are also overseen by the US Securities and Exchange Commission (SEC) as well as the Financial Industry Regulatory Authority (FINRA) in addition to government departments. This additional oversight means producers looking to sell variable annuities and RILAs will have to jump through a few more hoops to do so.
Like fixed annuities, an agent will first need a valid life insurance license. But they must also register with FINRA and pass specific series exams depending on which products they want to focus their sales on.
Series 6 samples
The Series 6 test offers producers a limited investment license for securities. Pass-throughs can sell packaged investments including variable annuities. Before taking the Series 6 securities test, you must obtain sponsorship from a brokerage firm that will monitor your activities and customer transactions. The exam contains 100 multiple-choice questions and to pass, a candidate must score at least 70 percent.
Series 7 sample
By passing the General Securities Representative Qualification Exam, also known as the Series 7 exam, a producer can offer almost any type of collateral (with restrictions around real estate, life insurance, and commodity futures). Because this test covers so many aspects of securities, it is also considered the most rigorous. Once an agent has secured a sponsor from a FINRA-registered brokerage firm and has studied sufficiently, they can take the six-hour exam.
Series 63 exam
Several states also require producers to pass the Uniform Securities Agent State Law Exam, or Series 63 exam, in order to sell securities such as variable annuities. The Series 63 exam focuses primarily on ensuring that a producer is familiar with the state securities rules outlined in the Uniform Securities Act. Passing a Series 63 exam doesn’t mean much by itself. Producers must also register with FINRA by completing either the Series 6 or Series 7 exam to sell variable annuities.
Series 65 exam
If, instead of selling annuities on a commission basis, you are more interested in charging clients a fee for securities advice, you must pass the Series 65 exam. Passing this test does not allow a producer to sell securities, but it does allow them to act as investment advisors to their clients. If a producer wants to both sell securities that require a Series 7 license and charge for securities advisory services, they have the option to skip the Series 63 and 65 exams and instead complete a combination of the Series 66 exams.
Each of these tests is challenging and covers a great deal of information. These tests help ensure that anyone looking to sell securities has the knowledge and expertise they need to act in the best interests of consumers. And the producers are not looking to pass. They must complete continuing education requirements every three years to stay in compliance with FINRA rules and maintain their licenses.
Keeping track of annuity license requirements doesn’t have to be difficult
The world of licensing requirements to sell annuities is indeed complicated, but for good reason. When it comes to annuities, especially variable annuities and other security-based types, consumers put a lot of trust in their agent. The tests do their part to help weed out any unscrupulous individuals who might want to take advantage of the complexity and confusion common in these insurance products.
Of course, the complex licensing requirements also make it a bit more complicated to keep track of compliance for producers selling annuities. This is where AgentSync comes in. Our solution makes it easy to manage and validate the various license requirements for annuity sellers.
While our solution can’t validate FINRA series qualifications, it can help producers, carriers and agencies working in the life insurance and annuity industry stay compliant when it comes to selling fixed and fixed index annuities (which, as we mentioned, are kind of on fire right now). If you want to take the worry out of compliance and get your licensed life insurance producers to jump on the fixed annuity bandwagon sooner rather than later, see what AgentSync can do for you.