Insurance Risk & Investor Profile
Overview
Insurance products can be suitable in many different situations. Annuities are commonly used to create retirement income, while life insurance pays a death benefit when the insured person dies. This chapter highlights key suitability considerations for both products.
Annuities
Both fixed and variable annuities can provide income for life. After a contract is annuitized, payments continue until the death of the owner. That lifetime income feature can be a strong fit for someone who wants retirement income they can’t outlive.
⚠️ The beneficiary trade-off
At the same time, lifetime payments can create a trade-off for the owner’s family and/or beneficiaries.
- Consider what happens if a life annuity is annuitized and the owner dies shortly afterward.
- With a life annuity, the insurance company keeps the remaining value of the contract (minus any payments already made).
- That can leave little or nothing for a surviving spouse or children.
Because of this, life annuitization is generally most appropriate for someone who does NOT intend to leave annuity assets to beneficiaries.
Fixed vs. variable annuities — the “push and pull”
| Fixed annuity | Variable annuity | |
|---|---|---|
| Payments upon annuitization | Consistent payments that grow annually at a fixed rate | Consistent payments, but the payment level fluctuates based on returns of the separate account |
| Growth | Guaranteed fixed rate | If the separate account performs well, payments increase; if it performs poorly, payments decrease |
| Inflation risk | ⚠️ Subject to inflation risk — like bonds | Can help offset inflation risk (if invested in common stock) |
| Investment choice | N/A | Holder may allocate part or all of the separate account to common stock investments, which tend to outpace inflation over long periods of time |
| Main drawback | Can lose purchasing power during periods of higher inflation | Payments can decline if the separate account underperforms |
| Suitable for | An investor who wants to avoid market risk | An investor who wants exposure to the growth of the stock or bond markets |
Example from the text: suppose an annuity holder’s payments increase by 3% per year. If inflation rises to 5%, the cost of goods and services is increasing faster than the annuity payments. The result is a loss of purchasing power.
🔑 Annuities as a supplement, not a primary plan
Most financial advisers do not recommend using any type of annuity as a person’s primary retirement plan.
- Accounts such as a 401(k), 403(b), or individual retirement account (IRA) often provide better tax benefits, more investment flexibility, and lower fees.
- Annuities are typically best suited for investors who want to supplement retirement savings.
Example from the text: suppose a 30-year-old investor has access to a 401(k) at work and an IRA. If possible, they should maximize contributions to those accounts — especially if the employer matches contributions to the 401(k). If the investor still has additional money to save for retirement, contributing those funds to an annuity may be suitable.
Life insurance
Life insurance is most appropriate when someone would face a financial loss if another person dies.
Example from the text: suppose a working mother provides all the income for her family, including her husband and two children. If she dies without life insurance, the surviving family members may not have the resources to support themselves.
Term life insurance
Term life insurance is most suitable for someone who wants low-cost coverage for a specific period.
A common suitable profile: a young couple in a low tax bracket with a newborn child. A low tax bracket suggests the family has limited income and may not be able to afford large premiums. If either parent dies during the term, the policy pays a death benefit.
All other types of life insurance
All other types of life insurance are generally suitable for someone who wants coverage for their entire life. In recommendation-based questions, you’ll usually be given the client’s priorities. Match the product type to the priority:
🔑 Match the client priority to the product
| If the client’s priority is… | Then the appropriate product is… |
|---|---|
| Flexible premiums | Universal types of life insurance |
| Concern about inflation risk | Variable types of life insurance |
| A guaranteed growth rate | Whole or universal life insurance |
| Low-cost coverage for a specific period | Term life insurance |
| Coverage for their entire life | All types other than term |
Key points
Annuities suitability
- Suitable for those seeking retirement income
- Best if utilized as a retirement income supplement
- Suitable for those without beneficiaries
- Fixed annuities:
- Guaranteed fixed growth of payments
- Subject to inflation risk
- Variable annuities
- Variable payments
- Hedge against inflation
Life insurance suitability
- Suitable for those supporting beneficiaries
- Term life insurance:
- Suitable for those seeking cheap insurance
- All other forms of life insurance:
- Suitable for those seeking coverage over their life
- Suitability depends on the characteristics of life insurance chosen
Sources
Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.
| # | Source | Publisher |
|---|---|---|
| 1 | Rule 2111 — suitability, reasonable-basis/customer-specific/quantitative | FINRA |
| 2 | Updated investor bulletin — variable annuities | SEC / Investor.gov |
| 3 | Indexed annuities — participation rate, cap, floor | SEC / Investor.gov |
| 4 | Achievable Series 65 — chapter 1.6.4 | Achievable (course text) |