1.11 Annuities & Life Insurance
This chapter covers the insurance products a Series 65 candidate has to tell apart: annuities that turn savings into retirement income, and life insurance that pays a death benefit. Much of the exam content is about which products count as securities, who bears the investment risk, and how each is taxed. Advisers use the same distinctions to match a product to a client’s income needs, family obligations and tolerance for risk.
What each topic covers
Fixed, Variable & Deferred Annuities establishes that a variable annuity is a security, because the investor controls a separate account and bears the risk, while a fixed annuity is not, because the insurer invests the general account and guarantees a typically low rate. It separates the accumulation phase, where accumulation units are bought, from the distribution phase, where they convert into a fixed number of annuity units. You also learn the death benefit (the greater of basis or account value), M&E charges averaging around 1.25% a year, and the age 59 ½ and 10% penalty rules. Non-annuitized withdrawals are taxed LIFO, annuitized payments use the exclusion ratio, and payout options include straight life, life with period certain, joint with last survivor and unit refund. A qualified annuity taxes the whole withdrawal and has RMDs starting at age 73.
Index Crediting, Caps & Floors covers the equity indexed annuity, which links its return to an index such as the S&P 500 and guarantees a floor of at least 0%, sometimes as high as 3%. It is generally not a security. Insurers limit gains with a participation rate, a cap and a spread rate; in the worked example, a 9% index return with an 80% participation rate becomes 7.2%, and a 6% cap holds the credit to 6%. The lesson then compares the crediting methods (annual reset, point-to-point, high water mark and low water mark) and ends on surrender charges, which can reach 10%, with surrender periods of at least 6 years and often 10 or more.
Term, Whole & Variable Life compares five policy types side by side. Term life covers a specific period, commonly 10, 15 or 20 years, with fixed premiums and no cash value, and most insurers will not renew after age 80. Whole life keeps fixed premiums and builds cash value in the insurer’s general account at a guaranteed rate, and universal life adds flexible premiums. Variable and universal variable life put cash value in a separate account, so the policyholder bears the investment risk, the policy is a security, and the seller needs both securities and insurance licenses. The lesson also covers the generally income-tax-free death benefit, the unlimited marital exemption, and the four options for a whole life holder who wants to stop paying premiums, including a life (viatical) settlement.
Insurance Risk & Investor Profile matches products to clients. Lifetime annuity income suits someone who does not want to outlive their savings, but a life annuity leaves the insurer holding the remaining value, so it fits best when the owner does not plan to leave annuity assets to beneficiaries. A fixed annuity carries inflation risk, while a variable annuity can help offset it. Most advisers do not recommend any annuity as a primary retirement plan, since a 401(k), 403(b) or IRA often offers better tax benefits, more flexibility and lower fees. On the life side, term suits a young couple in a low tax bracket with a newborn, and flexible premiums point to universal, inflation concern to variable, and guaranteed growth to whole or universal.