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  • Writer's pictureRetirement and Annuity Advisor Jennifer Lang

Understanding Annuity Suitability

Updated: Sep 24, 2020

Are you under the age of 59 1/2? The Retirement Red Zone is defined as the 10 years before and the 10 years after retirement. It's a critical period when you may have less time to recover from investment mistakes and poor investment performance.

For retirees that are transitioning from the accumulation phase to the distribution phase of retirement planning, it's important to protect that nest egg you have built up over the years.

Why do people buy annuities?

Well, in general, there are several reasons. Annuities provide safety, long-term growth and income. Annuities allow you to manage how much income and how much risk you're comfortable with. Annuities are a way to save your money tax deferred until you are ready to receive retirement income and they offer "insurance" against outliving your retirement savings.

For other clients who are uninsurable, and who can't qualify for life insurance, buying a deferred annuity gives them an alternative way of leaving a death benefit to their heirs. Annuity applicants have to pass suitability requirements, not health and medical history as with life insurance policies.

Because annuities are guaranteed contracts issued by life insurance companies, it's important to understand the process of buying an annuity. Let's start with the biggest question - Why do life insurance companies ask for so much personal information when you buy an annuity? The life insurance company will ask questions to not only protect them, the company, but to protect you the consumer as well.

As you start shopping for an annuity, you know these contracts can make good financial sense for guaranteed lifetime income and protection from stock market risk, so let's break down the application process. _____________________________________________________________________

How can I take some pressure off my retirement portfolio?

Hypothetical friends Owen and Clara demonstrate how two potential strategies for retirement income compare in the face of market losses, longevity, inflation, and low rates. Whose strategy is more efficient for reducing the pressure on their portfolio to help meet their financial objectives? Watch the video to find out.

How would Clara's annuity account look if we applied interest credit?

Many indexed annuities credit interest annually based upon the performance of an index, limited to an annual cap rate.

  • In a year that the index rises more than the cap rate, the interest credit is the cap rate.

  • In a year that the index rises less than the cap rate, the entire increase is credited.

  • In a year that the index declines, the annuity's value is protected from the decline, and there is no interest credit.

To show how this works, here's an example using the actual changes in the S&P 500 ™ during the calendar years 2006 - 2016.

The calculation is based on a premium of $225,000 and cap rate of 4.5%. This calculation does not reflect any particular indexed annuity product, thus it does not reflect or guarantee future performance of any product. Keep in mind that on most indexed annuities, the carrier can change the cap rate from year to year. So this is a conservative calculation.

What's most important to see is that during a negative year (2008) the account did not lose any value.

Get Your Free Annuity Quote Now.........Click here


What are suitability standards?

As you get more serious about your purchase, you will discover that some insurers want lots of detailed information about you including things like what investments you own and what your income is.

Alarm bells may ring for you if you’re leery of providing such data. You wonder who is going to look at it, how they are going to use it and whether it will be stored securely. We frequently get asked questions about this by customers who value their privacy and security.

Rules seek to make sure your annuity fits your needs

The reality is that these checks are part of a regulatory effort to make sure that consumers like you are not getting talked into buying products that are inappropriate for their needs or means. The effort is designed to ensure "annuity suitability" – the term regulators use to refer to making sure there is a good match between your circumstances and the terms of your annuity.

So while you may not love the idea of making these disclosures to your insurance company, the reality is, that they are required by state law to gather this information. The aim is not to sell you more or put your name on a marketing list but rather to comply with rules which make sure you are matched with a product that meets your needs.

For example, the application will ask the source of funds being used to buy the annuity and let's say you are using your 401K, which has an account value of $1 million.

So for a client with a $1 million portfolio, the maximum annuity he/she could purchase is a $500,000 annuity. The life insurance company's major concern is that the client have sufficient enough funds available after the purchase of the annuity in case the client has an emergency.

Therefore, the life insurance company would only allow an annuity purchase of no more than 50% of your 401K. Anything greater would cause the application to be declined.

When you go to buy or exchange an annuity, as you move forward with the transaction, it is up to the insurance carrier to ensure that your financial objectives and needs are appropriately addressed.

The NAIC (the National Association of Insurance Commissioners) says that when assessing a transaction, insurers and agents must reasonably believe that:

  • You would benefit from the annuity.

  • The annuity is suitable for you.

Insurers have to maintain procedures to detect any recommendations that aren’t suitable. They can face sanctions or penalties if they don’t comply. The rules also require annuity agents to get adequate training.


Watch the following video to understand how a sequence of returns can deplete your assets sooner than expected.

Rolling over a portion of your 401K now, is a tax-efficient income strategy that can add tens of thousands of dollars to a retiree's estate value and may add up to 6 additional years of portfolio longevity. Rolling over to a Fixed Index Annuity (FIA) is a non-taxable transaction that protects you from two major retirement dangers: market risk and longevity risk. They provide a safe haven from stock market downturns by contractually guaranteeing principal and annual gains against loss with the potential for index credited growth.

Basically, buying an annuity means making a commitment to set aside funds now and allowing the funds to grow for a set period of time, typically 5 - 10 years. Afterward, you can elect to annuitize (start receiving checks) or allow the money to continue to grow tax-deferred.

Get Your Free Annuity Quote Now.........Click here


What information is gathered?

Based on these regulations, there are 12 key factors that must be considered. These criteria include your:

  • Age

  • Annual income

  • Financial situation and need, including the financial resources that you are using to fund the annuity purchase itself

  • Financial experience

  • Financial objectives

  • Intended use of the annuity

  • Financial time horizon

  • Existing assets, including any investments and life insurance holdings that you currently own

  • Liquidity needs

  • Liquid net worth

  • Risk tolerance

  • Tax status

This information is collected to ensure that the annuity purchase will not cause you significant financial hardship when making the annuity's premium deposits, based on your annual income, your net worth, or your other financial status.

How the suitability process works

The exact process varies by insurer, but generally insurers check to verify you are not putting more than half of your liquid net worth in an annuity. If so, they want heightened review of your plans that will take into account your age and total liquid net worth.

The older you are, the greater emphasis they will put on making sure you have enough money to cover expenses. Suitability reviews are more rigorous for those over 65.

In addition, the total size of your liquid assets is a factor. The lower the amount, the less insurers want to see allocated to deferred annuities. They also look for documentation that you have resources to cover an emergency.

If the company decides the annuity isn’t suitable for you, they will contact your agent and usually send a letter to you.

How insurance companies use your information

The primary goal of collecting all of this information about you and your financial status prior to the sale of an annuity is to document you have a thorough understanding of all of the features of the annuity contract, as well as to ensure that the particular annuity that is being presented to you is suitable.

Some insurers also ask agents to keep notes about how they arrived at the conclusion that your annuity was a good match for you and any recommendations they made.

Once this data is collected, however, the insurance company may not share or sell your nonpublic personal information to any non-affiliated third party without first obtaining your consent to do so, as this would be considered a violation of the Right to Financial Privacy Act.

The insurance companies are required to keep your information so they can document their efforts to comply with the rule if they are audited. Otherwise, no one sees it. The companies stress that they have safeguards in place to protect your data, and we have not heard of any breaches of this information.

Can I opt out of this requirement?

Some companies will allow you to opt out of disclosing if you sign a statement saying you refused to give the information and understand you are losing protections and redresses offered by the law. A few insurers do follow-up checks to make sure your sales person didn’t encourage you to do that as a way of circumventing the suitability rules.

Other companies, however, will not allow you to buy their contracts if you don’t participate in the suitability process. At that point, you have to weigh how important your privacy is if the most attractive annuity is offered by a company that won’t let you opt out. It’s a personal decision, of course, but we would encourage you not to let the annuity suitability disclosure be the deciding factor in your decision.

The Bottom Line

Overall, annuities can be an important component to your portfolio mix - especially given increased longevity and the need for guaranteed lifetime income going forward since you don't want to run out of income before running out of time.

Yet, because all investors' situations and needs are unique, it is still essential to ensure that each and every product is suitable for the individual consumer who will be purchasing it. Therefore, having suitability regulations in place can make your annuity purchase more financially sound.

Retirement is wonderful if you have two essentials: Much to live on, and much to live for. WILL YOUR RETIREMENT INCOME LAST?

We can help take the guess work out of having money into your 80s, 90s and 100s .....

Because fixed indexed annuities (FIAs) offer predictable income, Americans feel more comfortable when withdrawing funds from these retirement vehicles, as opposed to an IRA or 401(k). Choosing a FIA is an efficient way to plan for your future, as your interest earnings rate always remains somewhere between the interest rate floor and the cap. In turn, no matter what happens in the market, you can count on payments throughout your golden years.

Contact us now.

At we specialize in no-market risk strategies.

We only work with the top 20 annuity carriers and we do the hard work for you. We shop around not only for the best rate, but we have exclusive No Fee annuities that offer liquidity, the Highest Indexed Growth Potential, Enhanced Death Benefit Doublers along with Long-Term Care/Nursing Home Benefits. None of which the stock market can offer.

See related article: Annuity Strategies


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401(k), 403(b), 457, and other qualified retirement plans are tax-advantaged plans established by the IRS to help Americans save for their retirement years. Many organizations that offer these plans provide their employees with self-service options to access the savings and investment components within these plans. Working with a professional to review your options, as well as the impact of those selections on your savings and retirement income potential, can prove to be invaluable advice for the future.

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