Introduction
Had Jane Austen lived in the 21st century, her Mrs. Dashwood might have added: “and very complicated, too.” As most financial advisors can attest, annuities have evolved into very complex financial instruments. That complexity has stirred up a debate. On one hand are those who can list 10 good reasons why everyone should invest in annuities, while an equal number of advisors have lists of reasons why no one should invest in annuities, ever. As with most debates, the truth can be found somewhere between the two extremes.
At one time, an annuity was a simple concept — it was simply a series of payments. The word “annuity” comes from the Latin word for year, annum. Initially, an annuity was a fixed annual payment paid to the recipient for the remainder of his or her lifetime. It was simply a type of pension (and what concerned Mrs. Dashwood was that once her husband agreed to pay his half-sisters an annuity, he would be “on the hook” to make annual payments for the rest of their lives).
Today most annuities pay monthly income, and the term has come to describe any stream of payments for a guaranteed period of time. The payout period may be fixed, such as ten years, or the annuity period can be measured in terms of the recipient’s life. The concept of an income stream that lasts a lifetime is, for many, a very comforting thought. There are, however, financial advisors who twist this reassuring concept into a fear-driven sales pitch: “What if you outlive your income?” Such sales practices, coupled with the complexity of today’s annuities, have prompted regulators to enact new suitability rules for advisors who recommend the purchase of annuities to their clients.
Before we can explore the new suitability requirements, we first have to understand how various types of annuity contracts work, optional features that may be added to a basic contract, and the fees annuity holders pay. The course is organized as follows:
- › Chapter 1 — Annuity Basics covers contract details: types of annuity contracts, optional features, and fees.
- › Chapter 2 — Taxation of Annuities reviews the special tax treatment of annuity contracts.
- › Chapter 3 — Marketplace & Regulation discusses the market for annuities and the regulatory framework in which today’s annuity industry operates.
- › Chapter 4 — Investors & Objectives turns attention to investors: their needs, objectives, and financial and non-financial circumstances.
- › Chapter 5 — Suitability examines the factors a salesperson should consider in determining whether a recommended product is suitable for his or her client.
- › Chapter 6 — Disclosure & Agent Responsibilities reviews the specific laws and rules governing the sale of annuities.