ANNUITIES: ONE SIZE DOES NOT FIT ALL

NATIONAL ASSOCIATION OF INSURANCE AND FINANCIAL ADVISORS FLORIDA 1836 Hermitage Blvd, Suite 200, Tallahassee, FL 32308 Contact: Paul S. Brawner (850) 422-1701 brawner@faifa.org This self study course is approved by the Florida Department of Financial Services for continuing education credit. Provider is the National Association of Insurance and Financial Advisors Florida (#654). Course is approved for one (1) hour of credit, intermediate level, for course authority 2 14. Course ID # is 75186. HERE S HOW IT WORKS: Read the following article and when you re ready to take the exam, simply contact Paul S. Brawner at brawner@faifa.org and request the exam. You ll receive the exam and an affidavit attesting you did not receive help on the exam. Return the exam and signed affidavit via fax, e mail or regular mail (see contact information at top of page). Upon successful completion of the exam (70% or higher), NAIFA FL will send you a Certificate of Completion within 20 business days. ANNUITIES: ONE SIZE DOES NOT FIT ALL 1 Hour of Self Study CE I. INTRODUCTION Course Reading Assignment The intent of this course is to provide information on two commonly used types of annuities, and in the process highlight the fact that one size doesn t fit all. One particular type of annuity is not a guaranteed fit for every type of client. To get closer to the point of determining which type of annuity is right for a client, we should start out by asking ourselves what is an annuity, and what do we want it to accomplish? Simply put, an annuity can be described as an annual payment which can be designed to protect lifetime income. It is this very feature that differentiates it from mutual funds and CD s, and with certain riders it can protect against inflation with some of the types of annuities available today. Mutual funds and CD s do not provide lifetime income riders, and gains or losses with mutual funds cannot be locked in with the underlying risks. The consumer has the risk and the losses that may occur. 1

A good question to ask is why a client would choose an annuity over some other investment, such as a mutual fund. To answer the question with a question, does the client insure their house? Their car? Most, if not all, will say they do insure those assets. Since that is the case then why would your client not want to sure one of their largest assets their retirement. That is in fact what annuities, whether variable or deferred, can do. Combining the features and benefits of an annuity with certain optional riders can be a solid approach to protecting that retirement. In the sections that follow we ll go into greater depth regarding all these facets of annuities. Even if there is just a return of principal on an annuity that benefit alone is better than having your retirement portfolio down 40% and now unable to retire. As we go through the reading you can see why there is a cost to protect your livelihood in retirement, and why more people today after the market volatility over the last couple of years have gone towards annuities with certain guarantees. After all life is about choices, doing your homework and advising your client properly about the types of annuities and the different riders that can make your client more comfortable about their upcoming or impending retirement. It s also about providing them that peace of mind knowing they made the proper choice to protect their nest egg. In today s economy, more and more people are realizing annuities can provide income that they cannot outlive, which can done by annuitizing their funds and in turn reducing the fear that many people have already faced. Wouldn t your clients rather have peace of mind of not outliving their income? The consequences can be quite a nightmare. While life insurance protects against dying too soon an annuity can provide that financial hedge against living to long. Consider today s longer life spans more stories of people living to reach centurion status, a milestone that no doubt will become more commonplace. What will your clients do to ensure that they have lifelong income? What is your client s plan of action for retirement and how will you assist them in recommending and implementing a suitable plan that meets their needs? The subject of this course is annuities, and whether or not they are appropriate for your client. And if they are appropriate, what type of annuity should they choose: non qualified or qualified, immediate or deferred, fixed, fixed indexed or variable? One or more of these options may be a very appropriate choice for the client in deciding how best to create and protect their retirement. However, the agent must always remember that one size does not fit all. 2

SECTION REVIEW QUESTION 1 (check answer at end of reading assignment) (Ref: Section I, Page 1, Para 1) Which of the following statements is TRUE? a. Annuity riders allow insurance companies to avoid paying unnecessary claims b. All mutual funds and CD s provide lifetime income riders c. An annuity can be described as an annual payment designed to protect lifetime income d. Gains or losses with mutual funds can be locked in with the underlying risks. II. TYPES OF ANNUITIES As most agents already know, there are a variety of annuity types available to the client. This is why one size does not fit everyone. A good fact finder and an understanding of a client s needs are instrumental in advising and recommending what is suitable for them, their family and heirs, and the legacy they may wish to leave. This legacy could also involve charitable goals, thereby giving the estate a tax credit and reducing the size of the estate. If we look at the most basic of annuities there is the fixed annuity, which by its very definition gives it a fixed rate of interest. On the upside the fixed annuity presents very little risk to the client the majority of risk belongs to the insurance company. On the down side the fixed annuity may not keep up with inflation and adversely affect the buying power a person would need in their retirement years a span that could easily last ten, twenty, thirty five or more years. The fixed annuity may be most appropriate for people who want safety of principal and a guaranteed interest on their annuity cash value. Another consideration with the fixed annuity is that the client may take either a draw before annuitizing, or an annual amount of up to 10% of the principal. This is a fairly standard provision within the industry. However, it s very important to remember that your clients will need to consider keeping withdrawals to between 4% and 6% to avoid exhausting their funds too early in retirement. It would be quite devastating for someone to become indigent, or be forced to return to work, for failing to have a good retirement plan or enough to live on. Lastly, an additional feature with a fixed annuity is it has a contractually guaranteed minimum interest rate. This guaranteed minimum rate will provide a level of comfort to the fixed annuity purchaser, especially when current CD rates and savings accounts rates continue to drop and become unattractive to the risk adverse investor. The second type of annuity is the Fixed Indexed annuity (previously known as the equity index annuity). This type of annuity is not tied to the earnings of the insurance company but rather to a specific index. This class of annuities yields returns on your contributions based on a specified equity based index, such as the Standard and Poor 500 (S&P 500). This type of annuity can be 3

suitable for clients who want more potential growth than a fixed annuity, but still not have the risk of the variable annuity. Insurance companies commonly offer a provision of a guaranteed minimum return with fixed indexed annuities, so even if the stock index does poorly, the annuitant will have some of his downside risk of loss limited. However, it also is common for an annuitant's yields to be somewhat lower than expected due to the combination of caps on the maximum amount of interest earned and fee related deductions. SECTION REVIEW QUESTION 2 (check answer at end of reading assignment) (Ref: Section II, Page 3, Para 5) Which type of annuity is tied to a specific index? a. A Variable Annuity b. A Fixed Indexed Annuity c. A Fixed Annuity d. A Deferred Annuity For example, suppose a fixed indexed annuity is based on the S&P 500, which earns 10% one year. The terms of an fixed indexed annuity might state that fees will be 2.5% and that the maximum cap on returns is 9%. In this case, the annuitant would only receive a total of 6.5% (9% 2.5%) return from his or her annuity. One of the other features of the indexed annuity is that it cannot lose money in a down market. For example, if the market is down 7% for the year, the client would be credited with 0% interest. Some people are comfortable with this margin of safety without risk. On the flip side, someone who really needs to have a minimum amount of interest credited to their annuity would likely not be comfortable with this type of annuity. They would probably prefer a fixed annuity with a guaranteed minimum interest rate, even if that rate is 2% or 3%. The fixed indexed annuity may be suitable for clients who do not want any risk of loss but who would still like the potential for gains tied to a market index. The third type of annuity we ll discuss is called a Variable Annuity. This type of annuity is an insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio. A variable annuity offers a range of investment options, although the portfolio generally invests in equity securities such as mutual funds that invest in stocks, bonds, money market instruments, or some combination thereof. 4

Although variable annuities are typically invested in mutual funds, they differ from mutual funds in several important ways: First, variable annuities let the client receive periodic payments for the rest of their life, or the life of a spouse or any other person designated. This feature offers protection against the possibility that, after they retire, they might outlive their assets. Second, variable annuities have a death benefit. If the annuitant dies before the insurer has started making payments, the beneficiary is guaranteed to receive a specified amount typically at least the amount of any purchase payments. The beneficiary would get a benefit from this feature if, at the time of the annuitant s death, the account value is less than the guaranteed amount. Third, variable, as well as fixed and fixed index annuities, are tax deferred, meaning the client pays no taxes on the income and investment gains from the annuity until they withdraw money. The client may also transfer money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When they take their money out of a variable annuity, however, they will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. In general, the benefits of tax deferral will outweigh the costs of a variable annuity only if held it as a long term investment to meet retirement and other long range goals. Agents should be certain to advise their clients of this fact, and to reiterate that they are not suitable for meeting short term goals because substantial taxes and insurance company charges may apply if withdrawals are made early. Variable annuities also involve investment risks, just as mutual funds do. A variable annuity has two phases: an accumulation phase and an annuitization (payout) phase. During the accumulation phase, purchase payments are made which can be allocated to a number of investment options within the annuity subaccounts. For example, 40% could be designated for a bond fund, 40% to a U.S. stock fund, and 20% to an international stock fund. The money allocated to each mutual fund investment option will increase or decrease over time, depending on the fund's performance. In addition, variable annuities often allow allocation of a portion of the purchase payments to a fixed account. A fixed account, unlike a mutual fund, pays a fixed rate of interest. The insurance company may reset this interest rate periodically, but it will usually provide a guaranteed minimum (e.g., 3% per year). During the accumulation phase, money can be transferred from one investment option to another without paying tax on the investment income and gains, although there may be a charge by the insurance company for transfers. However, if the money is withdrawn from the account during the early years of the accumulation phase, there may be a "surrender charges," which is discussed in subsequent paragraphs. On top of that, there may be a 10% federal tax penalty on money withdrawn before age 59½. 5

When an insurance company begins paying out the proceeds of an annuity on a monthly basis, the annuity is said to be annuitizing, and the process is called annuitization. Annuitization is a process where the contract converts from the pay in phase to the pay out phase the accumulation period ends and the annuity period begins. At this time, the annuitant selects a settlement option and the accumulation units are converted to a fixed number of annuity units according to a formula. Once completed the number of annuity units will never change. What varies is the value of each annuity unit, which will depend on the value of the portfolio in the separate account. When the performance of the separate account changes, the value of each annuity unit changes, and therefore the payment which is calculated by multiplying the number of annuity units times the value of one to the annuitant changes. Variable annuity contracts specify how often the payout can be changed: monthly, quarterly, semi annually, or annually. The calculation for the first payment of a variable annuity is the same as for the fixed annuity, but the dollar amount is converted to an equivalent of annuity units. For a variable annuity, the number of annuity units is calculated by dividing the first payment by the current value of an annuity unit. This will yield a number that will not change during the annuity period; what changes is the value of the annuity unit. Thus, the annuitant s payment is equal to the number of annuity units times the value of each unit. So if $500 is the first payment, and $5 is the value of each annuity unit, then the annuitant has an interest in 100 units, which will not change. The value of the annuity unit, and therefore the payment to the annuitant, will rise and fall, depending on the value of the annuity unit, which in turn, will depend on the performance of the separate account. Annuitization can be immediate, deferred or partial. Deferred or partial annuitization can be extremely beneficial to a client not wanting to lock up all of the funds into annuitization payments. At the beginning of the payout phase, the client may receive their purchase payments plus investment income and gains (if any) as a lump sum payment, or they may choose to receive them as a stream of payments at regular intervals (generally monthly). If they choose to receive a stream of payments, they may have a number of choices of how long the payments will last. Under most annuity contracts, a client can choose to have their annuity payments last for a period that they set (such as 20 years), or for an indefinite period (such as their lifetime or the lifetime of them and their and your spouse or other beneficiary). During the payout phase, their annuity contract may permit them to choose between receiving payments that are fixed in amount or payments that vary based on the performance of investment options. The amount of each periodic payment will depend, in part, on the time period selected for receiving payments. Be aware that some annuities do not allow withdrawals once regular annuity payments have begun. 6

SECTION REVIEW QUESTION 3 (check answer at end of reading assignment) (Ref: Section II, Page 5, Para 3) Which of the following phases of a variable annuity allows for purchase payments? a. Annuitization b. Accreditation c. Accumulation d. Actualization III. Funding Methods Let s now change gears a bit and consider how premiums are introduced. There are two primary methods for funding. Some annuities are funded with one payment (single premium annuities) while some are funded over time (flexible premium annuities). With the single payment method, as you might expect, the annuity purchaser pays one premium. With that, the annuity is funded at the time the payment (premium) is made in order to receive payments (return of premiums and any earnings) later. Single premium annuities can either be immediate or deferred, meaning they can begin paying out now or later as the client needs. If it is an immediate annuity it is only funded once, and requires a distribution starting date that is typically within one year of the initial premium payment. If it is a deferred annuity then payouts begin at a later date, perhaps years in the future. Although deferred annuities can be funded with a single premium, mostly they are funded over a period of time. Periodic payments can be made until the annuity payout period begins. Annuities that utilize periodic funding can be divided into two categories: Level premium funding: Premium payments are made on a regular, ongoing basis. Payments can be made either monthly or annually, depending on the terms of the contract. Flexible premium funding: Premium payments are flexible and can occasionally be skipped. Insurers may impose an annual minimum and maximum on the amount of premiums that can be paid in. With the flexible premium method a client can continually put funds into their contract for a period of time prior to retirement, allowing for systematic and continued deferred growth. 7

SECTION REVIEW QUESTION 4 (check answer at end of reading assignment) (Ref: Section III, Page 7, Para 1) Annuities can be funded using which of the following methods? a. Single Premium and Flexible Premium b. Monthly payment or Annual payment c. Fixed Pay and Annuitization d. Immediate pay and Deferred Pay IV. Riders, Benefits and Expenses A common feature of annuities is the death benefit. If the annuity holder dies, a person designated as a beneficiary (such as spouse or child) will receive the greater of: (i) all the money in the account, or (ii) some guaranteed minimum (such as all purchase payments minus prior withdrawals). Annuities sometimes offer other optional features, which also have extra charges. One common feature, the Guaranteed Minimum Income Benefit, guarantees a particular minimum level of annuity payments, even if there isn t enough money in the account (perhaps because of investment losses) to support that level of payments. Other features may include long term care insurance, which pays for home health care or nursing home care. Annuity Death Benefit Rider This benefit guarantees if the annuity holder dies before the payout begins, the beneficiary will be paid the full value or the total premiums paid, whichever is higher. Annuity Living Benefit Rider This benefit rider gives three options: the first ensures the annuity holder will receive all of what they put into it, the second guarantee a minimum interest rate or higher, and the last that once payments begin, all payments stay the same. Annuity Riders Increase Payment Options This option allows the annuity holder to choose from three options: a lump sum payment, regular withdrawals until the money runs out, or guaranteed payments for life. Some riders offer both withdrawals and the lifetime annuity. As we get into the annuity contract we see there are many moving parts and riders to consider. Knowing your client and what they are trying to accomplish will help eliminate some of the choices. Some clients may be averse to fees which could eliminate indexed or variable annuities immediately. Annual fees are simply the annual contract maintenance fees ranging anywhere from $25.00 to $60.00. In many contracts this fee is waived when account balances reach certain limits such, as $50,000.00 or $100,000.00. Some carriers will also reduce the fee or give a credit if the annuity holder elects to receive the prospectus electronically instead of regular mail. 8

Withdrawal fees are an extremely important feature to consider. Most companies allow an annuity holder to withdraw funds penalty free prior to maturity of the contract. This is usually 10% of the contract value, but can be higher. Any amount beyond that incurs a penalty charge. The most common fee associated with withdrawing funds from an annuity is called a Surrender Charge. A surrender charge is a type of fee the annuity holder must pay if the annuity is sold or funds are withdrawn during the "surrender period". The Surrender Period is a set timeframe that surrender charges apply, and typically lasts six to eight years after purchase of the annuity. However, surrender periods can be much higher up to 15 years or more. Surrender charges will reduce the value of, and the return on, the investment. This fee is set up as a decreasing percentage per year of contract. As an example, on an eight year contract the first year penalty may be 7% in thee first year, and declining to 0% in the eight year of the contract. Not surprisingly, surrender charges and surrender periods are a critical element of discussion between the agent and the client. SECTION REVIEW QUESTION 5 (check answer at end of reading assignment) (Ref: Section IV, Page 8, Para 2) Annuities sometimes offer optional features or riders, which are always added to the annuity free of charge or fee to the purchaser. a. True b. False Other expenses specific to annuity contracts are the Mortality and Expense (M & E) charges for the sub accounts. Any time an insurance company offers an annuity to someone, it must make assumptions about uncertain factors (such as the life expectancy of the annuitant) and the likelihood of uncertain events actually occurring; it must also provide the annuitant with peace of mind via lifetime payout options for the future and fixed insurance premiums, and other items such as the minimum guaranteed interest rate. It is intended to cover the cost of death benefits (the mortality portion) and the expenses of other insured income guarantees that might be included with the annuity contract. The insurance company prices these risks inherent to the structure of an annuity as accurately as possible and packages it into a dollar value charge for the annuitant. M & E charges are the asset based fee for management of the sub accounts, and should not be confused with mutual fund expenses (even though it may appear very similar). Mutual fund fees/ charges are used to pay the fund managers and the fund s operating expenses. There are also penalties, which are sometimes waived for nursing homes or for early termination of a contract, that is subsequently rolled into a more favorable contract with the same carrier. 9

This will vary by carrier so it is vital to read the prospectus thoroughly. Interestingly, many companies normally do not charge penalties for dying before maturity of the contract. While this may sound absurd, consumers may ask the question. Even if it is not asked it is a point the agent should make. Too often consumers feel they are locked in, a potential deciding factor that may make them think they are better off CD s or mutual funds. It is vital for the agent to explain the options, benefits and especially the guarantees that an annuity can offer that mutual funds or CDs cannot. For example, an option for consumers is to take an early surrender penalty to go into a new contract that may have more attractive features or riders, with bonus interest to offset the penalty to roll into a new contract. Additionally, the consumer has the option of a tax advantaged 1035 exchange. Again, all options should be thoroughly explained to the client. Three riders we ll discuss at this time are known as GMAB, GMIB and GMWB. The first rider, called the Guaranteed Minimum Accumulation Benefit, guarantees the initial investment after a holding period; which in some contracts may be ten years. The GMAB guarantees that the account value will be stepped up to a certain amount on a future date if the actual account value is less than the guaranteed minimum accumulation amount. Also if the account value is higher than the GMAB the client will receive the higher amount. The second rider, the Guaranteed Minimum Income Benefit (GMIB), is a type of option annuitants can purchase for their retirement annuities. When the annuity has been annuitized, this specific option guarantees that the annuitant will receive a minimum value's worth of payments. In some contracts that could be 5% or 6% guaranteed annually, depending on the carrier and when the contract was purchased. The third type of living rider is the Guaranteed Minimum Withdrawal Benefit (GMWB). This rider locks in the gains using a ratchet, or Step up Basis, on an annual basis, allowing for a more substantial income later in life. These riders, in conjunction with tax deferral, professional money management and asset allocation, gives the consumer a diverse investment offering. SECTION REVIEW QUESTION 6 (check answer at end of reading assignment) (Ref: Section IV, Page 9, Para 4) Which of the following riders guarantees that the annuitant will receive a minimum value worth of payments, such as 5% or 6% guarantee annually? a. Guaranteed Minimum Withdrawal Benefit (GMWB) b. Guaranteed Minimum Accumulation Benefit (GMAB) c. Guaranteed Minimum Income Benefit (GMIB) d. Guaranteed Maximum Withdrawal Benefit (GMWB) 10

V. Annuity Options Annuities can be structured using model portfolios, allowing the client to choose various portfolios similar to their risk tolerance, whether it is balanced, conservative, moderate, moderateaggressive and so forth. This relieves the client of the need to select individual sub accounts. By choosing one of the model portfolios indicative of their risk profile the research has already been done for them. The model portfolio option allows the client to take advantage of multiple fund companies without additional charges. As an example, a client could choose multiple funds all in one model portfolio, allowing him/her to have multiple sub accounts without the additional costs. Creating a model portfolio after determining the client s risks eliminates some of the guesswork and provides for a more balanced portfolio. Another option available is the life annuity. This is an arrangement that features a predetermined periodic payout amount until the death of the annuitant. These annuities are most frequently used to help retirees budget their money after retirement. Typically, the annuitant pays into the annuity on a periodic basis when he or she is still working. However, annuitants may also buy the annuity product in one large purchase. When the annuitant retires, the annuity makes periodic (usually monthly) payouts to the annuitant, providing a reliable source of income. When a triggering event (such as death) occurs, the periodic payments from the annuity usually cease since there is no beneficiary. In addition to the Life Annuity Option, a consumer can also opt for a Period Certain annuity. This option allows the client to select a specific time period for which the annuity income payments will last. This is unlike the more commonly selected life option just mentioned, in which the annuitant receives an income payment for the rest of his or her life, regardless of how long (or short) their retirement years end up lasting. By selecting the period certain annuitization option, the annuitant is usually able to receive a higher monthly payment than with the life option. This extra income comes with a price though: the risk that the annuity payments will run out before the annuitant's death. For example, say a 65 year old annuitant decided to start receiving payments from his or her annuity, and chose a 15 year period certain payout option. This which would provide him or her with a retirement income until the age of 80. Should the annuitant die at or before age 80 there is no problem. However, should they live longer than 80 and not have another source of income there can be major consequences. Lastly, there is the joint and survivor option, which allows the annuity to continue income payments as long as one annuitant, out of two or more annuitants, remains alive. For example, a married couple would receive an income for as long as both spouses are alive. Thereafter, payments would continue as long as the surviving spouse is alive, usually for a smaller amount. This type of annuity can be ideal for a husband and wife because it can guarantee the surviving 11

spouse an income for life. However, even with a Life Annuity Certain or other type of refund annuity, it is possible for a surviving spouse to outlive the income from the annuity. Some annuities now incorporate features such as Long Term Care (LTC) coverage. This feature allows some of the money in the annuity to be put aside for LTC needs. However, in the event the LTC coverage is not needed the funds can be used within the annuity. Additionally, another benefit that can be added with certain carriers is a lifetime rider on the LTC feature, allowing the owner to ensure sufficient funds are available should the long term care benefit need exceed the value of the annuity. Some may consider this a better feature, with less underwriting constraints, than a traditional Long Term Care policy. SECTION REVIEW QUESTION 7 (check answer at end of reading assignment) (Ref: Section V, Page 11, Para 4) Which of the following option allows the annuity to continue income payments as long as one annuitant, out of two or more annuitants, remains alive? a. Multiple Payor b. Joint and Survivor c. Survivor Beneficiary d. Life Annuity One last option available to the client is a concept called laddering. This is simply a process of purchasing multiple contracts with varied lengths so as to not lock into a single long term contract. Considering present economic conditions it is probably safe to say a client will likely not want to be locked into a long contract with a low interest rate. VI. Unauthorized Entities Unauthorized entities engaging in insurance are a serious and growing problem in Florida for consumers and agents. Consumers are substantially harmed with these entities failing to pay claims and defrauding through deception. Agents are unwittingly (sometimes knowingly) representing these entities and placing clients and themselves at risk. Florida law is violated under the guise of these unauthorized entities claiming to be ERISA exempt or some type of association plan that claims to not be insurance or to be exempt from Florida regulation. All of this is simply not true! This is a problem in the state of Florida and other states. The problem of unauthorized entities selling unauthorized products originated in the health insurance arena, although the problem now seems to be spreading into property casualty arena as well. These unauthorized entities promised low health insurance premiums, a promise fueled by skyrocketing health 12

insurance premiums with legitimate health insurance carriers. In the current market, low health insurance rates just do not exist. The public and certain agents, apparently, were ripe for the picking by these scam artists. Remember, these are scams and the intent is to collect as much premium as possible without having to pay claims, or very few claims. Unsuspecting licensed insurance agents are also vulnerable to this type of scam because representatives of the unauthorized entity will contact the licensed agents and send them (or give them in person) printed marketing materials touting the unauthorized entity and their bogus products which, again, gives the impression of legitimacy and credibility. Maybe the agent is asking too many questions of the representative is just a little too inquisitive about who they are, where they re located, how long they ve been in business, etc. The agent may even question the legitimacy of the product. Some scam artists tell agents their products do not have to be authorized by the Department because it is an ERISA plan, or that the plan is part of a MEWA (multiple employer welfare arrangement) or it s to be sold to labor unions all the while stating that under any of these previouslymention circumstances, the products do not have to be approved or authorized by the Department. The representative of the unauthorized entity might say, It doesn t require approval, because this is an ERISA plan. Or, It doesn t require approval because this is plan is part of a MEWA plan. Or This plan doesn t require approval because it s for labor unions. None of this is correct! Any product which contains an insurance component is required, by law, to receive authorization of that component by the Department before it can be sold in Florida. Any legitimate company representative who approaches you about selling and representing their products should not mind the scrutiny you put them under by verifying their status with the Department. 626.902 Penalty for representing unauthorized insurer. (1) In addition to any other penalties provided in the insurance code: (a) Any agent licensed in this state who in this state represents or aids an unauthorized insurer in violation of s. 626.901 commits a felony of the third degree, punishable as provided in s. 775.082 or s. 775.083. (b) Any person other than an insurance agent licensed in this state who in this state represents or aids an unauthorized insurer in violation of s. 626.901 commits a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084.(2) In addition to the penalties provided for in subsection (1), such violator shall be liable, personally, jointly and severally with any other person or persons liable therefore, for payment of taxes payable on account of such insurance under s. 626.938. Agents or any other persons are prohibited from representing or aiding an unauthorized insurer. If an agent or any other person represents an unauthorized insurer, they are subject to severe penalties, including possible civil and criminal action. Agents are subject to suspension or revocation of their licenses and/or monetary penalties for violation of the unauthorized insurer law. Agents can be held liable for claims and losses not paid by unauthorized insurers. Agents who represent or aid an unauthorized insurer commit a felony of the third degree. 13

Don t be fooled by phony products that sound too good to be true! Investigate before you sell or buy these plans. Check to see if an entity or plan is an authorized insurer by calling the Department of Financial Services at 877 693 5236 or 850 413 3089. SECTION REVIEW QUESTION 8 (check answer at end of reading assignment) (Ref: Section VI, Page 12, Para 2) The problem of unauthorized entities selling unauthorized products originated in which product area? a. Workers Compensation insurance b. Life insurance c. Personal and business insurance d. Health insurance This course has provided just a sampling of some of the features, benefits and options of various annuities available to the consumer, and as you can see they can become very complex. It is vital for the agent to become knowledgeable about annuities, and carefully study the prospectus, so that all available options for the consumer are properly considered and presented. Just because there are different types of annuities on the market doesn t mean all sizes fit all consumers. SECTION REVIEW QUESTIONS ANSWER KEY 1. C 2. B 3. C 4. A 5. B 6. C 7. B 8. D 14