1. Introduction to Annuities: The History of Annuities
  2. Introduction to Annuities: Basics of Annuities
  3. Introduction to Annuities: Advantages and Disadvantages
  4. Introduction to Annuities: Marketing and Regulation
  5. Introduction to Annuities: Fixed Contracts
  6. Introduction to Annuities: Indexed Annuities
  7. Introduction to Annuities: Variable Annuities
  8. Introduction to Annuities: Guaranteed Minimums, Long-Term Care
  9. Introduction to Annuities: Conclusion

Although only life insurance companies can issue annuities in the United States, these investment vehicles are marketed by many different types of organizations and individuals. Some of the key entities that offer these products include:

  • banks
  • life insurance agents and brokers
  • stockbrokers and Registered Investment Advisers 
  • financial planners
  • estate and trust officers
  • mutual fund companies

Licensing Requirements

Any person directly involved in the selling and marketing of annuities must carry an active life insurance license, regardless of which of the above categories they are in, plus a securities license if dealing with variable contracts. Many personal bankers are licensed to sell fixed annuities to bank customers, although banks can no longer directly issue annuities themselves.

Controversial Marketing Practices

Despite their advantages, annuities are among the most misunderstood and mis-marketed financial products in existence. Although they are designed as retirement vehicles, they are sometimes used as one-size-fits-all investments. Clients and prospects should be aware that most brokers and planners are paid a much larger commission on annuity sales than just about any other type of product that they can sell. Although the standard range of payout is usually about 4% to 6% for fixed and variable contracts, some indexed annuities pay commissions of up to 12% to 15%. For this reason, many financial professionals are biased toward selling these products to clients, regardless of suitability or other factors. Being worth such a large commission also means these vehicles are very profitable to issuers. 

One marketing practice that has received a fair amount of negative publicity in both the financial and mainstream media pertains to indexed annuities. Some agents have aggressively pursued the senior market with long-term, high-surrender–charge indexed annuity products, into which they attempt to put virtually all of their clients' liquid assets. This practice has been – and is being – closely scrutinized by state regulators nationwide. Another debate rages over the practice of funding IRAs and qualified plans with fixed and variable annuity contracts. This strategy is controversial because the tax-deferred feature of annuities is irrelevant inside a plan or account that is already tax-deferred. This issue will be covered in greater detail in a later section.

Because of these questions, be very wary when a salesperson offers to switch the annuity you have for one with supposedly better benefits. For one thing, if your annuity is several decades old, you could have bought it when interest rates were much higher than they are now. Should You Replace Your Annuity – or Not? has the details. In 2016, FINRA (the Financial Industry Regulatory Authority) levied a $25 million fine against MetLife for excessive replacement of variable annuity contracts for the sole purpose of generating commissions.

State Regulation

The annuity marketplace is primarily regulated at the state level because all life insurance companies – and all agents and brokers who sell annuities – must have a life insurance license issued by their state of residence. Fixed and indexed offerings are regulated almost solely at this level because they are not considered securities and therefore fall outside the jurisdiction of the Securities and Exchange Commission (SEC).

Every state has an insurance commissioner who oversees all of the life insurance and annuity business done within the state. The insurance commissioner's office also has a disciplinary record of every registered life insurance agent and broker in the state, and investors can call the commissioner's office to get the background on any person who sells them annuities. They can also call here to register a complaint about their agent or contract.

Federal Regulation

In addition to state regulation, annuities are ultimately defined and governed by the Internal Revenue Code (IRC). The SEC and FINRA oversee the variable annuity market as well, since selling them requires a securities license. Indexed annuities are presently still considered a type of fixed annuity, but there is a definite possibility that these vehicles will eventually be classified as securities due to their market participation.

In the remaining sections of this tutorial, we will examine the three major categories of annuities:

1. Fixed Annuities – appropriate for conservative investors who want or need a guarantee of principal and interest

2. Indexed Annuities – appropriate for moderate investors who want to participate in the markets without risking their principal

3. Variable Annuities – appropriate for moderate to aggressive investors who are willing to risk their principal while saving for retirement (these contracts can also be used by conservative investors with the purchase of guaranteed income riders)

We will examine fixed annuities in Section 5.


Introduction to Annuities: Fixed Contracts
Related Articles
  1. Retirement

    Watch Your Back In The Annuity Game

    Find out how to get the upper hand when dealing with this payout challenge.
  2. Retirement

    Who Benefits From Retirement Annuities

    Annuities guarantee some degree of fixed income in retirement. But is the security worth the fees and less favorable tax treatment? How to decide.
  3. Retirement

    Are Annuities Retirement-Only Investments?

    Learn more about why annuities are generally purchased and the way that they can positively and negatively affect an individual preparing for retirement.
  4. Retirement

    How a Variable Annuity Works After Retirement

    These investments can provide extra income after you retire. Here’s a guide to when and how you will receive the payout.
  5. Insights

    Are Equity-Indexed Annuities Right For You?

    Equity-indexed annuities can be confusing to understand, but for conservative investors, they can be valuable savings plans.
  6. Retirement

    Taking The Bite Out Of Annuity Losses

    If this investment product has caused you sleepless nights, it's time to consider alternatives.
  7. Financial Advisor

    Annuities: A Solution for Baby Boomer Retirees?

    Annuities can provide guaranteed lifetime income at a time when retirement outlooks are seemingly bleak. Here's the lowdown on why they can be good.
  8. Retirement

    Retirement Annuities: Know the Pros and Cons

    Retirement annuities can be a secure way to make sure you don’t outlive your assets. But be careful; fees are high.
  9. Retirement

    Buying Annuities in a Low Interest Rate World

    Learn if buying an annuity makes sense in a low interest rate environment. Also discover the different types of annuities and how interest rates affect them.
Frequently Asked Questions
  1. Why is there a negative correlation between quantity demanded and price?

    Learn what the law of demand is, the basic assumption of the law of demand and why there is a negative correlation between ...
  2. If an IRA owner dies after starting required minimum distributions (RMD) but the spouse is under 70½, can the spouse roll over the IRA into his/her own IRA, and stop RMDs until age 70½?

    If the IRA owner dies after the required beginning date (RBD) and his/her beneficiary is his/her spouse, the spouse beneficiary ...
  3. How do credit bureaus make money?

    Take a closer look at how credit bureaus make money, and learn about the kind of services they provide to both lenders and ...
  4. I make over $120,000/yr and my adjusted gross income precludes standard IRA contributions. My contributions to my 401(k) plan at work are limited to $18,500/yr. It seems I'm being penalized for my income. Are there other retirement savings options av

    Only your eligibility to deduct contributions will be affected. You may still make a nondeductible contribution up to the ...
Trading Center