Life & Health Insurance Exam (National Portion)Ethics and SuitabilityMedium
A client, Ms. Rodriguez, is interested in purchasing a deferred annuity. During the discussion, she mentions her primary goal is to have immediate access to all her funds without penalty in case of an emergency, while also maximizing growth. Which of the following statements by the agent would be most appropriate and ethical?
- AThis annuity offers excellent growth, and you can always access your money if needed, so it's a perfect fit.
- BI recommend purchasing a variable annuity; its investment flexibility will allow you to withdraw funds without penalty.
- CAnnuities are designed for long-term savings, and while they offer growth, early withdrawals often incur surrender charges and potential tax penalties.
- DWe can structure the annuity with a rider that guarantees immediate, penalty-free access to all funds, but it will reduce your growth.
Show answer & explanationAnswer & explanation
Correct answer: C. Annuities are designed for long-term savings, and while they offer growth, early withdrawals often incur surrender charges and potential tax penalties.
Annuities are generally long-term savings vehicles. Ethical agents must disclose the potential for surrender charges and tax penalties on early withdrawals, as liquidity is a key factor in suitability.
Why the other options are wrong
- A. This is misleading, as immediate, penalty-free access to all funds is generally not a feature of deferred annuities.
- B. Variable annuities have investment risk and still typically impose surrender charges for early withdrawals, making this advice unsuitable and potentially misleading.
- D. While some riders offer limited penalty-free withdrawals, a rider guaranteeing immediate, penalty-free access to ALL funds is generally not available on deferred annuities without significant penalties or a complete change in product type.
Annuity Liquidity Disclosure
Agents must clearly explain the liquidity features and limitations of annuities, including potential surrender charges and tax penalties for early withdrawals, to ensure suitability for the client's financial goals.
- Annuities are long-term savings products.
- Early withdrawals may incur surrender charges.
- Early withdrawals may be subject to income tax and a 10% penalty if taken before age 59½.
Memory trick: Annuities are long-term; disclose ALL fees and access limits clearly.