Annuities (Course Id 2451)

Annuities examines the annuity concept and explains what an annuity is and how it works. The mechanics of the accumulation and payout phases of an annuity are examined and sample calculations are discussed. An explanation of settlement options and their appropriate uses are covered. 

The course also discusses annuity taxation. Federal income tax treatment of premature withdrawals, lump-sum distributions and periodic payments is considered. Annuities discusses the different annuity contracts available and compares them with respect to client suitability, with particular emphasis on variable and fixed annuities. Both product types are discussed in terms of single vs. periodic premium, immediate vs. deferred, qualified vs. non-qualified, and settlement options.

NASBA QAS - Text - NASBA Registry - IRS Enrolled Agents - 2451

Course Learning Objectives

1. Describe a typical annuity buyer and the principal reasons individuals buy annuity contracts
2. List the characteristics of annuities and the benefits of tax deferral
3. Explain how variable annuities work
4. Identify the cash value management tools available to a variable annuity contract owner
5. List the factors to be considered in determining variable annuity suitability
6. Calculate interest to be credited under various fixed annuity contracts
7. Explain the operation of indexed annuities
8. Describe how annuities are taxed
9. Recognize the requirements imposed on the sale of variable annuities under Regulation Best Interest

Chapter 1
Introduction to Annuities and Annuity Buyers

• Describe the profile of a typical annuity purchaser;
  
• Identify the principal reasons why individuals purchase annuities;
  
• Explain the traditional concept of an annuity; and
  
• Identify the parties to an annuity contract and discuss their roles.

Chapter 2
Characteristics of Annuities

• Identify the methods by which annuity premium payments are made;
  
• List the expenses generally associated with annuity contracts;
  
• Explain when payout begins under deferred and immediate annuities;
  
• Discuss how cash values are accumulated;
  
• Describe annuity death benefits; and
  
• Discuss the various annuitization methods available to settle annuity proceeds.

Chapter 3
Variable Annuities

• Discuss how cash values are determined in a variable annuity;
  
• Explain how the various variable annuity cash value management tools help contract owners manage the volatility of variable annuity cash values allocated to variable subaccounts;
  
• Identify the various guaranteed living benefits available on variable annuity contracts;
  
• Describe how variable annuitization may enable a contract owner to overcome the erosion of annuity income and keep pace with inflation;
  
• Discuss the features and benefits of variable annuities; and
  
• List the factors that should be evaluated in determining the suitability of a variable annuity for a customer.

Chapter 4
Types of Fixed Annuity Contracts

• Discuss how the current crediting interest rate is determined in declared-rate annuities;
  
• Distinguish bonus and multi-year guarantee annuities from other types of annuities;
  
• Describe the factors that affect the effective crediting interest rate in indexed annuities;
  
• Explain how index call options are used in the operation of indexed annuities; and
  
• Identify the various interest crediting methods used in indexed annuities.

Chapter 5
Annuity Taxation

• Discuss the income tax treatment of nonqualified annuity premiums and cash values;
  
• Explain how nonqualified annuity surrenders and withdrawals are taxed;
  
• Describe the exclusion ratio and its impact on the tax-free recovery of basis from periodic annuity payments made under nonqualified annuity contracts; and
  
• Explain the income and estate tax treatment of death benefits received under a nonqualified annuity contract.

Chapter 6
Annuity Sales Practices, Replacement and Disclosure Requirements

• Define suitability in the context of an annuity transaction;
  
• Describe the client information required to perform an appropriate annuity suitability analysis;
  
• List the types of information that must be disclosed when making an annuity recommendation;
  
• Identify those situations in which an insurance producer has no suitability obligation to the client; and
  
• Describe the suitability recordkeeping obligations to which insurance producers are subject in connection with recommended annuity transactions.

Course Learning Objectives

How You Will Learn

Why This Information is Important and How You Can Use It

Chapter 1 - Introduction to Annuities and Annuity Buyers

Important Lesson Points

Chapter Learning Objectives

Introduction

Demographics of Non-Qualified Annuity Purchasers

Annuity Demographic Changes

Why Buyers Purchase Non-Qualified Annuities

Guaranteed Lifetime Income Study

Anticipated Annuity Market

The Annuity Concept

Annuities in Operation

Summary

Test Your Comprehension

Chapter 2 - Characteristics of Annuities

Important Lesson Points

Chapter Learning Objectives

Introduction

Premiums

Single Premium Annuities

Level Premium Annuities

Flexible Premium Annuities

Annuity Expenses

Surrender Charges

M&E Charges and Investment Advisory Fees

Lives Covered by the Annuity

Multiple Life Annuities

When Payout Begins

Deferred Annuity

Immediate Annuity

Cash Value Accumulation

Fixed Annuities

Variable Annuities

Death Benefits

Annuitization Methods

Temporary Annuity

Life Annuity

Annuities and the SECURE Act 2.0

Qualifying Longevity Annuity Contracts

Divorce After QLAC Purchase

Penalty on Partial Annuitization

Summary

Test Your Comprehension

Chapter 3 - Variable Annuities

Important Lesson Points

Chapter Learning Objectives

Introduction

Separate Account and Structured Investment Option

Insurer’s General Account Supports Variable Annuity’s Fixed Account

Deferred Annuity Accumulation

Variable Subaccounts Comprise Insurer’s Separate Account

Variable Subaccount Value may Fluctuate Daily

VA Accumulation Units

Structured Investment Option

Managing Separate Account Volatility

Separate Account Management Tools

Diversification

Asset Allocation

Automatic Subaccount Re-balancing

Fund Transfer

Dollar Cost Averaging

Interest Sweep

Variable Annuity Death Benefits

Traditional Variable Annuity Death Benefit Guarantee

Variable Annuity Rollup Death Benefit Guarantee

Variable Annuity Step-Up Death Benefit Guarantee

Living Benefit Guarantees

Guaranteed Minimum Income Benefit

Guaranteed Minimum Accumulation Benefit

Guaranteed Withdrawal Benefit

Variable Annuity Payout (Annuitization) Phase

Mechanics of Variable Annuitization

Features and Benefits

Suitability

Compliance Requirements

Combining Fixed and Variable Annuities

Summary

Test Your Comprehension

Chapter 4 - Types of Fixed Annuity Contracts

Important Lesson Points

Chapter Learning Objectives

Introduction

Traditional Declared-Rate Annuities

Bonus Annuities

Multi-Year Guarantee Annuities

Indexed Annuities

Current Interest Rates base on an Interest Index

Current Interest Rates base on an Equity Index

Determining Indexed Annuity Cash Value

Index Call Options

Interest Crediting Methods

Spread

Cap Rate

Annuitization in Indexed Annuity Contracts

Guaranteed Lifetime Withdrawal Benefits

Summary

Test Your Comprehension

Chapter 5 - Annuity Taxation

Important Lesson Points

Chapter Learning Objectives

Introduction

Income Tax Treatment

Premiums

Cash Values

Surrenders and Withdrawals

Annuity Payments During Lifetime

Thumbnail Summary of Nonqualified Annuity Taxation

Annuitant’s Death After Annuity Starting Date

Contract Owner’s Death Before Annuity Starting Date

Estate Tax Treatment

Summary

Test Your Comprehension

Chapter 6 Annuity Sales Practices, Replacement and Disclosure Requirements

Important Lesson Points

Chapter Learning Objectives

Introduction

Suitability

Securities Exchange Commission Rules

Regulation Best Interest

Effect of Regulation Best Interest

Suitability Defined

Suitability Requirements

Buyer Competence

Replacement and Exchange

Mitigation of Suitability Requirement

Obtaining and Maintaining Records

Disclosure

Potential Surrender Period and Surrender Charge

Potential Tax Penalties

Mortality and Expense Risk Charges and Investment Advisory Fees

Rider Charges and Features

Limitations on Interest Crediting

Insurance and Investment Components

Market Risk

Annuity Sales & Best Interest Obligation

Nature of a “Recommendation”

The Care Obligation

The Disclosure Obligation

The Conflict of Interest Obligation

The Documentation Obligation

Transactions not Based on a Producer Recommendation

Summary

Test Your Comprehension

Appendix A - Bond Ratings

Appendix B - Basic Characteristics Of Securities

Appendix C - Decisional Factors in Variable Annuity Suitability

Appendix D - Variable Annuity Buyer Profile

Appendix E - Annuity 1035 Exchange Considerations

Appendix F - Annuity, 401(k) & IRAs

Appendix G - Formulas & Examples

Appendix H - Agent Disclosure

Appendix I - Refusal to Provide Information

Appendix J - Non-Recommended Purchase

Glossary