6.2.13. Suitability
When recommending a fixed annuity versus a variable annuity to a customer, a representative needs to know the customer’s risk tolerance. A fixed annuity purchaser 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, the IRS allows the earnings from an annuity to grow tax-free, so annuities can be good retirement vehicles. That said, contributions to traditional IRAs and 401(k) plans reduce one’s taxable income, a feature that most annuities do not offer. 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. Additionally, because annuities grow tax-free, there is no extra tax benefit from holding an annuity inside an IRA or a 401(k).
If a customer will need funds in the near future, an immediate annuity is more suitable than a deferred annuity.
When communicating with a customer about a deferred variable annuity, a broker must describe the annuity’s specific features. These include:
• Potential surrender period and surrender charge
• Potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 59 1/2
• Subject to market risk
Additionally, a broker must have a reasonable basis to believe that a customer will benefit from certain features of deferred variable annuities, such as tax-deferred growth and a death benefit. A broker must also be aware that the underlying securities and subaccounts to which funds are allocated at the time of the purchase are suitable for the particular customer.