Course Description and Objectives

Due to the public’s demand for – and benefit from - guarantees, flexibility and diversity in financial products; and the need for the manufacturers, issuers, distributors, regulators and the media to contribute to the flow of information about fixed indexed annuities, the National Association for Fixed Annuities has developed a course to provide insurance agents with the education and knowledge tools necessary to market, sell and service fixed indexed products. This course will cover the different types of indexed products, which include fixed life insurance and fixed annuities. The NAFA Fixed Indexed Product Training Course will explain fixed indexed annuities and life insurance products:

·         Mechanics;

·         Features;

·         Terminology;

·         Restrictions and limitations;

·         Benefits and guarantees;

·         Suitability;

·         State requirements for disclosure and illustration; and

·         Product riders and their background, evolution and popular appeal.

Fixed indexed insurance products are a natural evolution of the traditional fixed insurance product, which offers one method of crediting interest. Fixed indexed insurance products are nothing more than a traditional fixed insurance product that offers owners an opportunity, often on an optional basis, to receive interest based on positive changes in a financial markets index coupled with insurance guarantees of purchase payments and minimum rates of interest. In other words, fixed indexed insurance products offer guaranteed preservation of purchase payments coupled with guaranteed growth in value, even when indexed-based interest is small or non-existent.

Fixed indexed insurance products generally provide all of the insurance coverage of traditional insurance products, including death benefits, withdrawal options, payout options and benefits triggered by disability or incapacitation.

These insurance guarantees mean that only life insurance companies and certain financial institutions that meet exempt rules under the Securities Act of 1993 can issue fixed indexed insurance products. Life insurance companies are subject to strict regulation by the states. State regulation is designed to assure that life insurance companies will have sufficient assets to make good on their guarantees, even if the general economy and the business fortunes of an individual life insurance company fall. Moreover, fixed indexed insurance products are backed by state guarantee funds. These funds provide the money to compensate owners if a life insurance company defaults.

Chapter 1

Definition and Types of Annuities

An annuity is a financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.

The first annuity type is identified according to when benefits are paid out.

·         Immediate Annuities — An immediate annuity is a contract that is purchased with one payment and has a specified payment plan which starts immediately. This type of annuity is sometimes used when a person turns 65 or reaches retirement age.

·         Deferred Annuities — Currently, most fixed indexed annuities are deferred annuities. All annuities offer an owner the opportunity to receive, usually after retirement, periodic annuity payments guaranteed for life. Deferred annuities offer an owner the additional opportunity to accumulate purchase payments with interest, before retirement, on a tax-deferred basis.

·         Split Annuities — A split annuity is the term given to an effective strategy that utilizes two or more different annuity products – one designed to generate monthly income and the other to restore the original starting principal over a set period of time. The split annuity typically uses what is known as a single premium deferred annuity and a single premium immediate annuity. Within the split annuity, the immediate annuity repays you a set sum of money each and every month over a specified period of time. The other annuity is left in place to grow on a fixed interest basis, with the goal being that by the time the monthly payments are depleted, the deferred annuity will be fully restored to the original starting principal. You can then restart the process with prevailing interest rates or reevaluate the retirement and investment strategy as needed.

The two types of annuities that are identified according to how and when premiums are paid are called Single Premium Annuities and Flexible Premium Annuities.

Single premium annuities accept one premium up front at the beginning of the contract. Flexible premium annuities allow one premium up front and then subsequent premiums. The period of payment, as well as the minimum and maximum premium payment amounts, is defined in the contract and any changes to the increase the periodic payment schedule, decrease the minimum and increase the maximum may be made by the company if it improves the customers contractual restrictions.

State insurance authorities regulate fixed life insurance and annuity insurance products, including indexed annuities, under state insurance laws. The Securities and Exchange Commission (SEC) regulates variable annuities and variable life insurance because these products differ in three important ways from those of fixed insurance products. These differences are investment risk, investment account, and benefits. The SEC has examined Indexed annuities and has not required that they be regulated under the federal securities laws.

Variable Insurance Products

The owners, not the insurance companies, assume the investment risk that the value of their benefits will decrease rather than increase under management of their money through the insurance companies. The federal securities laws apply to protect owners in light of this investment risk.

Purchase payments and earnings under these products are invested, usually through separate accounts of life insurance companies, in funds of stocks, bonds or money market instruments. Benefits vary up and down in dollar value with the increases and decreases in the investment performance of these stocks, bonds or money market instruments.

Fixed Insurance Products

The insurance company, and not the owner, assumes the investment risk regarding payment of the rate of interest derived by a formula with reference to an index.

An insurance company invests premiums in its general account. To fund the obligations under the indexed annuities, the general account includes an investment portfolio of options and futures or a reinsurance contract.

Benefits can increase in amount depending on the changes in financial market indexes. At the same time, benefits have guaranteed floors that protect against loss of principal and previously credited interest if the performance of financial market indexes is not favorable 

Two-Tired Annuities

This section will discuss two‑tiered annuities. The definition, difference in benefit levels and accessing the different benefit levels and what that means to the policyholder. In addition, we will discuss the advantages and disadvantages of two‑tiered annuities.

A two-tiered annuity is a product with three different values. These values are tier‑one value, the surrender value and the tier‑two value.

1.    Tier‑One Value — The first value is the tier-one value, which is the premium accumulated with interest earnings, just like a regular fixed annuity. This value is available to the client if they decide to surrender their contract as a lump sum after the surrender charge period.

2.    Surrender Value — The second value is the surrender value, which is the tier-one value less the surrender charge. This value is available to the client if they decide to surrender their contract as a lump sum during the surrender charge period.

3.    Tier‑Two Value — The third value is the tier-two value, which provides a benefit typically higher than the tier-one value and is only available to the client if they annuitize the contract. Tier-two benefits could include higher interest rates, higher index crediting, bonuses or other benefits, which encourage the client to annuitize thereby leaving assets longer with the insurance company. In some products clients must wait a certain period of time before they can access these higher tier-two values.

Why would a client buy a two-tier product?

Two-tier products can be valuable for the right client in several ways. If clients have a need for a lifetime stream of income, they could receive higher lifetime benefits under a two-tier product than under a regular deferred annuity that is annuitized or immediate annuity. Secondly, due to the design and pricing of two‑tier products, tier‑one credited rates could be higher than a non-tiered deferred annuity in the form of better participation rates, caps or fees.

What are some of the disadvantages of two‑tier products?

These products may not be suitable for clients that have short-term liquidity needs or a desire to pass on lump sum benefits to their heirs. In addition, clients usually have to wait a period of time to receive the higher tier‑two values and annuitization is required to receive those values, which spreads the benefits out over a period of time.

Insurance agents should be very clear that their clients who are considering a two‑tiered annuity understand the different values, how to access their values and the restrictions or consequences when they do. Clients should assess their needs and examine all aspects of an annuity product before determining if that particular annuity design fits their needs and financial goals.