Some of the major items that must be known in order to recommend a particular Single Premium Deferred Annuity
(SPDA):
Issuing Company. As with all policies, the rating of the issuing company must be taken into consideration. If an agent recommends a policy from a particular company that eventually is taken over by a regulatory agency because of financial difficulties, at the very least the professional reputation of the agent will be hurt, perhaps irreparable.
How Many SPDAs Does the Company Offer? If the company has several types of SPDAs, it certainly behooves the agent to find out what the difference is between the products. It may be possible to offer the applicant a wider choice with the same insurer - which may be the best or most financial secure company.
Minimum Premium for the Plan. This can range from $5,000 upwards to $50,000, most being in the $5,000 to $10,000 range. One would not be wise to offer an annuity with a minimum premium of $25,000 when the applicant only has $10,000 to invest in an annuity.
Maximum Issue Age and Maximum Annuitization Age. This can range from 80 to 95 issue age, and age 85 to 99 to indefinite for Annuitization age. For an elderly (very) person, this can be very important. Remember that many elderly applicants for SPDAs that can afford a sizeable premium, probably also have excellent attorneys in case the annuity does not perform as expected./
Current Interest Rate. The current interest rate jumps all over the place - in early 2004, for example, among the largest writers of SPDAs, the current rates ranged from 4.25% to 10.48%. The highest interest rate may not be the only criteria that matters, but it certainly is important. Clients usually want the "biggest bang for the buck" or why they don't have it.
Bonus Included in the Interest Rate? Again, this ranges from 0% to 7%. One might surmise that the companies with the highest bonus would have the lowest interest rate - but that is not necessarily true. For instance, a company with the 10.48% current interest rate, has a bonus of 7%. Proves again, the agent must be familiar with the contract.
Minimum Interest Guarantee. Ranges from 1.5% to 4.7%. Some may ask if that has any relation to the Bonus or Current interest rate. Maybe. For instance, the company offering the 10.48% current interest rate and bonus of 7% has a minimum guarantee of 1.5%.
Initial Rate SPDA Paid on New Policies and Interest Rate Credited to SPDAs Over the Past Five Years. This information is important because the prospective annuity purchaser may want to know exactly what had others gotten in recent years. The agent must be prepared for this, as everyone knows that interest rates have plummeted recently and it is so very difficult to predict what interest rates will do in the future. Really not apropos to anything, but interestingly, the initial rate over the past 5 years have run from "Not Applicable" (obviously) to as high as 8.25%. Interest rate credited ranged from 3% to 5% (including some 'proprietary information" - in other words, none of our business.) An agent should be aware of what interest has been credited on the annuities if they are licensed with the company.
Fees and Surrender Charges. Most companies have no fees, only surrender charges. This has been addressed in this text and can be different for the senior citizen than for other annuitants.
Free Partial Withdrawal, When Available and How Many a Year? Very important. The agent must know this "cold." At this time there is only one company reporting that they do not have a partial withdrawal. The other companies make such withdrawal available from immediately, to after the first contract year (most prevalent) and most allow one per year. Some allow the amount by percentage, such as one company allows immediate withdrawal with 10% free corridor. Another point that must be known. Cold! Clients nearly always want to know how they can get their premium (investment) back if something happens.
Condition to Qualify for Free Partial Withdrawal. If free withdrawal is allowed, then what does the client have to do to qualify for a "free" withdrawal. Some companies limit it to a percentage after certain time has expired, to several other conditions. These vary widely, so again, it must be known.
Surrender Charges. This is not partial withdrawal, obviously, but is the penalty if the annuity is surrendered. Generally companies have a surrender charge of 8-9-10% the first year, graded down each year until it is zero or no charge, which usually occurs at or about the 10th year. Pretty standard, but a good agent would never take this for granted - one company, for instance, has charges of (from first year to year of no charge) 6-6-6-5-4-3-2-0%. Another has 7-7-7-7-6-5-4-3-2-1%.
Situations When Surrender Fees are Waived. Death and annuitization universally. Others offer nursing home, terminal illness or hospital confinement. One company adds natural disaster (if this sounds far-fetched, think Hurricane Charley!). Sometimes if death is waived, it is waived only if an optional death benefit is chosen. If this were missed and death of an annuitant occurred, someone would have a hard time explaining to the heirs that an option was not chosen that just happens to be covered under nearly all other annuities.
Illinois Insurance Continuing Education
