A note About Annuity Investments by Seniors
MR. WATSON: Most state legislatures have established standards and procedures for recommendations made to senior consumers relating to annuities. These laws were created to ensure that such recommendations appropriately address the insurance needs and financial objectives of a senior at the time of the transaction. These laws apply to any recommendation to purchase or exchange a fixed or variable annuity whether the product is classified as an individual or group annuity. A senior consumer is any person age 65 or older. In cases of a joint purchase by more than one party, a purchaser is a senior consumer if any one party is age 65 or older.
MR. WATSON: An agent must have reasonable grounds for believing that the recommendation is suitable for the senior based upon the facts disclosed by the senior regarding his or her investments, other insurance products, and his or her financial situation. An agent is required to make reasonable efforts to obtain information concerning the senior's financial status, tax status, and investment objectives, among other specified information relevant to determining suitability. An agent is not responsible for any transaction wherein a consumer refuses to provide relevant information required by the agent, fails to provide accurate or complete information, or decides to enter into a transaction that is not based on the agent's recommendation. If the consumer refuses to provide relevant information requested by the agent, the agent must obtain a signed verification from the consumer that the consumer has refused to provide the requested information and may be limiting protections regarding the suitability of the sale.
MR. WATSON: Agents are required to maintain procedures that are reasonably designed to detect or prevent violations of this law. Agents are also required to maintain records relating to such transactions for a specified time that will be discussed in the law chapters. (You must know this time frame, so pay attention in the law chapters.) The insurer may maintain these records on behalf of the agent.
MR. WATSON: Persons who are registered with a member of the Financial Industry Regulatory Authority (FINRA) who is required to make a suitability determination and who makes and documents such determination is deemed to satisfy the requirements under this law for the recommendation of annuities.
Regulation & Licensing
Dual regulation - Variable annuities
MR. WATSON: In 1959 the Supreme Court ruled that variable contracts are subject to federal law and were to be regulated by SEC. Because they are insurance contracts as well, they are also regulated by the states. Thus, dually regulated. So, they are regulated by the states, but the separate account is regulated as a security and is regulated by the SEC and FINRA.
Agent licensing - Variable annuities
MR. WATSON: An agent must hold a life and variable contracts license. And a Series 6 or Series 7 license.
Marketing Practices & Suitability
Prospectus
MR. WATSON: For variable products, a prospectus is prepared by the insurance company and reviewed by the SEC. It contains information regarding the nature and purpose of the variable product, the separate account, and the risk involved. It must precede or accompany any sales presentation.
Agent's Identification on annuity contracts
MR. WATSON: The application must contain:
- the name of the insurance company
- name of the agent
- agent's I.D.
Change of Address
MR. WATSON: Agents must notify the department of any change in address, business street address, mailing address, phone, or email with-in 30 days. Failure to comply is a monetary fine that will be covered in the law chapters, as well as possible suspension or revocation of the license. (Please make sure you pay special attention for these details in the law chapters.)
Suitability
MR. WATSON: An agent must be clear as to the purpose of the sale and that it makes sense and is suitable to the insured whether it is a fixed, variable, or indexed annuity. The following information must be collected on a form approved by the department and signed by the applicant and the agent. If the applicant refuses to sign (I don't know why he wouldn't), the applicant must sign a form stating why he refuses. Also, if the applicant wants a certain type of annuity that does not suit him and the agent has advised against this purchase, yep, a form for that too. The agent's recommendations must be recorded.
- personal information
- tax status
- investment objectives
- source of funds being used to fund the annuity
- annual income
- intended use of the annuity
- existing assets
- liquid net worth
- financial situation & needs
- risk tolerance
Replacement or exchange of an annuity
MR. WATSON: If an exchange or replacement is being done, the agent must provide, on an approved form, information concerning the differences between the two, including:
- a comparison of the benefits
- a comparison of any fees
- a written basis for the recommended exchange, including advantages and disadvantages
- the agent must disclose any tax consequences as a result of the exchange or advise the client to consult a tax advisor
Income tax treatment of benefits
MR. WATSON: We have discussed this, but, here we go again.
- Cash Value Life Insurance: Loans are not taxed. Partial surrenders are taxed as "ordinary income" according to FIFO, first in, first out. Complete surrenders simply add any gain as income and is taxed as such (total premiums paid in less any policy dividends equals the "cost basis". Anything above that is taxed.
- Annuities: no taxes during the accumulation period. Lump sums, partial withdrawals, are taxed as LIFO, last in, first out. In addition, a penalty of 10% is imposed on withdrawals taken before age 59 1/2.
Exclusion Ratio Fixed Annuity
MR. WATSON: Because money paid into an annuity is with after tax dollars, the amount you receive each month representing this is not taxed. If annuitized, some portion of each check represents principle and is not taxed, the balance, representing interest is taxed. LIFO does not apply here. We use an exclusion ratio to determine what is not taxed. The total amount invested is spread out over one's life expectancy. The ratio, once again, is amount invested/expected return. ex. $150,000 / $200,000 equals 75%...75% of each check received is tax free.
