Series 7: 8.2.12 Suitability Of Annuities

8.2.12  Suitability of Annuities

When recommending a fixed annuity versus a variable annuity to a customer, the rep needs to evaluate the amount of risk the customer is willing to take. A fixed annuity investor values dependable payments for life over a high rate of return. A variable annuity is for those who are willing to endure greater risk for the possibility of higher earnings.

Deferred annuities may have long surrender periods, which makes them less suitable for people who may need access to their funds soon, such as retirees. Annuities may be appropriate for customers who want to be assured of a death benefit. In addition, they allow earnings to grow tax-free, so they can be a good retirement vehicle. That said, IRAs and 401(k) plans often offer tax deductions that most annuities do not, so a representative should make sure that a customer has reached the maximum amount that can be put into an IRA or 401(k) before investing in an annuity. Because both IRAs and annuities provide similar tax benefits, an annuity should never be put inside an IRA.

If a customer needs funds in the near future, an immediate annuity is more suitable than a deferred annuity.

See Chapter Ten for further discussion of suitability.