When it comes to annuities, who you buy from is almost as important as what you buy. You need to completely trust that the agent will walk you through the pros and cons of an annuity plan honestly, or else you could end up with a subpar product. Unfortunately for consumers, not all agents are held to the same standard.
For an agent to sell fixed annuities, they only need a life insurance license issued by their state of residence. Fixed annuities are primarily represented by five different products: single premium immediate annuities (SPIAs), longevity annuities (also called deferred income annuities or DIAs), fixed-rate annuities (also called multi-year guarantee annuities or MYGAs), qualified longevity annuity contracts (QLACs), and fixed index annuities (FIAs). Fixed annuities are categorized as a life insurance product, so a life insurance license is all that is needed to solicit and sell these types of strategies.
Annuities are regulated at the state level, and each state has its own department of insurance. The National Association of Insurance Commissioners is the governing body that has jurisdiction over all of the states. Variable annuities are considered securities, and so they are also overseen by the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). It seems like a lot of oversight, but the world of annuity sales is still considered something of a "wild west," where almost anything goes—especially concerning indexed annuities.
- For an agent to sell fixed annuities, they only need a life insurance license issued by their state of residence.
- Fixed annuities include single premium immediate annuities, longevity annuities, fixed-rate annuities, qualified longevity annuity contracts, and fixed index annuities.
- Annuities are regulated by state departments of insurance; variable annuities are also overseen by the SEC and FINRA.
- Annuity agents are becoming quite common, so do your research to determine their qualifications and background before choosing one.
Fixed Index Annuities
In some circles, there's an ongoing debate over whether fixed index annuities (FIAs) should be considered a security or not. Indexed annuities have a growth component that involves a call option on an index (typically the S&P 500), with a limitation ("cap") placed on the potential return. That intersection with the stock market has led some to call for stricter regulations, but the insurance industry has pushed back. As of January 2021, FIAs remain a form of fixed annuity, and they are not regulated as a security.
One reason that indexed annuity gunslingers and unregulated internet promoters don’t want indexed annuities to be classified as securities is that they would have to pass through more regulatory hoops to sell the products. Today, if an aspiring FIA seller clears their schedule, they could get licensed to sell indexed annuities in less than two weeks. All they need to do is pass their state’s life insurance exam. Some would argue that this sets a low bar for qualification, especially when considering the minimal continuing education requirements in most workplaces where annuities are sold.
Variable annuities aren't necessarily a better product than FIAs, but the licensing process is much more stringent. That's because variable annuities are classified as securities. To sell them, an agent will have to pass either a Series 7 test (which entitles them to sell most types of securities) or both Series 63 and Series 6 tests (which are tests more specifically focused on mutual funds, retirement plans, insurance products, and variable annuities). These tests are not easy, and even after passing them, agents must adhere to challenging continuing education requirements.
Do Your Research
Ask any agent you're speaking to about their financial background, and do your research on the internet concerning their qualifications before making any decisions. Tenure does not always equate to competence, but it is a good gauge for at least a basic financial foundation of knowledge. Annuity agents (especially indexed annuity “specialists”) are becoming as common as people with their real estate license. They are a dime a dozen, and they aren't all equally qualified to advise others on their retirement. Be careful out there. When in doubt, interview a wide range of advisors and agents to find the perfect fit for your personality and financial situation.