Selling Annuities: Do You Need A Life Insurance License?

In the US, individuals who want to sell annuities need to obtain a state-specific insurance license. This license allows them to legally sell insurance products, including annuities, within that particular state. To become a licensed life insurance agent, and sell annuities, one must go to their state’s Department of Insurance website and follow their guidelines. Generally, a state will require that an examination be passed to prove knowledge of the life insurance industry and the different products, features, and laws regarding it. It is also worth noting that a life insurance license will allow someone to sell annuities that fall under the fixed category, but not to sell variable annuities, securities, mutual funds, or other risk products.

Fixed annuities

The insurance carrier will guarantee the principal, which is the premium paid incrementally, plus a minimum rate of interest. The income paid out to the buyer can vary depending on how well the investments perform, but it will never drop below a guaranteed minimum. The insurance carriers invest premiums for fixed annuities conservatively, generally choosing secure vehicles such as corporate and government bonds.

To sell fixed annuities, a life insurance license is required. Although requirements differ by state, they generally involve taking a pre-licensing course and passing a state exam.

Variable annuities

The value of variable annuities is based on the performance of an underlying portfolio of sub-accounts selected by the annuity owner. Sub-accounts are similar to mutual funds. Two factors contribute to the payment amounts in a variable annuity: the principal (the amount of money the investor pays in advance) and the returns that the annuity's underlying investments deliver on that principal over time.

The most popular type of variable annuity is a deferred annuity, often used for retirement planning purposes. It provides a regular (monthly, quarterly, or annual) income stream, starting at some point in the future. There are also immediate annuities, which begin paying income as soon as the account is fully funded.

Indexed annuities

The rate on an indexed annuity is calculated based on the year-over-year gain in the index or its average monthly gain over a 12-month period. In years when the stock index declines, the insurance company credits the account with a minimum rate of return, typically around 2%.

There are no losses when the market isn't performing well, only gains when it is. However, these gains may be limited by provisions in the contract, such as participation rates and rate caps. While indexed annuities are linked to the performance of a specific index, the annuitant won't necessarily reap the full benefit of any rise in that index due to these provisions.

One important consideration when shopping for an indexed annuity is understanding how the insurance company calculates the investment return. This is determined by how the index is tracked and how much of the index return is credited to the annuitant. Insurance companies use different methods to track changes in the index value, and this will impact the return.

Some key factors that can impact the return credited to the annuitant include:

• Cap: An upper limit put on the return over a certain time period.
• Participation rate: The percentage of the index's return that is credited to the annuity.
• Spread/margin/asset fee: A percentage fee subtracted from the gain in the index linked to the annuity.
• Bonus: A percentage of the first-year premiums added to the contract value, which is often subject to a vesting schedule.
• Riders: Extra features, such as minimum lifetime guaranteed income, added to the annuity for additional costs.

It's also important to note that any return calculation for an indexed annuity excludes dividend income, as dividends are not included in the index return.

Before purchasing an indexed annuity, it's crucial to understand how these products work and the potential limitations on returns.

Licensing requirements

Selling annuities requires a licence, and the type of licence depends on the type of annuity being sold. The primary requirement for selling annuities is an insurance licence, which can be obtained by fulfilling pre-licensing education requirements, passing a licensing exam, and undergoing a background check.

Fixed Annuities

A standard life insurance licence issued by the seller's resident state is sufficient for selling fixed annuities. The regulating authorities for these types of annuities are the state departments of insurance and their governing body, the National Association of Insurance Commissioners.

Variable Annuities and Registered Index-Linked Annuities (RILAs)

Variable annuities and RILAs are classified as securities and are therefore overseen by the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) in addition to the state departments. To sell these products, agents need a valid life insurance licence and approval from FINRA, for which they must pass specific Series exams.

Series 6 Licence

Issued by FINRA, this licence permits the holder to sell variable annuities and other packaged investment products. To obtain this licence, individuals must be sponsored by a FINRA member firm and pass the Series 6 exam, which includes 100 multiple-choice questions with a passing score of 70%.

Series 7 Licence

Passing the Series 7 exam permits the holder to offer almost every type of security, with limitations on real estate, life insurance, and commodity futures. This exam is considered the most rigorous as it covers many aspects of securities. To take the exam, individuals must be sponsored by a FINRA-registered broker-dealer firm.

Series 63 Licence

Several states require agents to pass the Series 63 exam, which focuses on state securities regulations outlined in the Uniform Securities Act, in addition to either the Series 6 or Series 7 exam, to sell variable annuities.

Series 65 Licence

The Series 65 exam is for individuals who wish to charge clients a fee for securities advisory services rather than selling annuities on a commission basis. Passing this exam does not authorise the sale of securities but allows individuals to act as investment advisors.

Series 66 Licence

Individuals who wish to sell securities that require a Series 7 licence and charge for securities advisory services can opt to take the Series 66 exam instead of the individual Series 63 and 65 exams.

Continuing Education Requirements

Individuals who obtain these licences must complete continuing education requirements every three years to stay compliant with FINRA regulations and maintain their licences.

The selling process

The process of selling annuities involves several steps, including obtaining the necessary licenses, developing expertise, establishing a sales strategy, and connecting with clients. Here is a detailed guide on how to navigate the selling process:

Step One: Get Licensed

The first step in selling annuities is to obtain the required licenses. This typically involves getting a life insurance license in each state where you intend to sell annuities. Each state has its own laws and regulations regarding life insurance products, including annuities, and they are governed by the National Association of Insurance Commissioners. With a life insurance license, you can sell "fixed" annuities, such as Fixed Annuities, Fixed Indexed Annuities, Immediate Annuities, Deferred Immediate Annuities, and Single Premium Immediate Annuities.

To become a licensed life insurance agent, you need to fulfil the requirements of your specific state. This usually includes pre-licensing education, passing a state licensing exam, and undergoing a background check. Check your state's Department of Insurance website for specific guidelines and requirements. It is also recommended to take a pre-licensing course to prepare for the licensing exam.

Step Two: Find a Marketing Organization

The next step is to partner with a marketing organization, also known as an IMO (Independent Marketing Organization), FMO (Field Marketing Organization), NMO (National Marketing Office), BGA (Brokerage General Agent), or MGA (Managing General Agent). This relationship should be mutually beneficial, with both parties working together to increase profitability. When choosing a marketing organization, look for one that aligns with your values, business practices, and provides adequate tools and support. Ask questions about their specialization, resources, carriers, product selection, compensation, and testimonials from successful agents.

Step Three: Become an Expert

Developing expertise in the annuity industry is crucial before meeting with clients. Familiarize yourself with different types of annuities, annuity regulations, and the sales process. Understand the differences between immediate and deferred annuities, fixed, indexed, and variable annuities, and the associated risks and benefits. Study the products offered by various insurance companies and stay up to date with industry trends.

Step Four: Establish a Sales Process

Creating a structured sales process is essential for success. This includes knowing what to say and how to communicate effectively with clients, both over the phone and during appointments. Focus on educating your clients and recommending solutions that align with their best interests. Develop a systematic and deliberate approach that showcases your expertise and builds trust.

Step Five: Get in Front of Clients

The final step is to connect with potential clients and start offering annuity solutions. You can choose to prospect manually or outsource leads and marketing to specialized companies. When selecting lead companies, consider their rating, reviews, ease of contact, and experience in the industry. It is recommended to have at least three different lead sources to ensure a consistent flow of qualified leads.

Remember, selling annuities requires a strong foundation of knowledge, ethical practices, and a client-centric approach. By following these steps and staying committed to continuous learning and improvement, you can successfully navigate the annuity sales process.

Frequently asked questions