Wednesday, October 17, 2012

Sample Suitability Question for Series 7, Annuities

Even though many Series 7 candidates will not get their Life & Health licenses, expect your exam to ask a few questions about insurance-based products. Not just variable annuities, but fixed/equity-indexed annuities, and not just variable life insurance, but also perhaps a little bit about whole life and term life insurance. To make sure you know the basics of annuities, let's do a sample suitability question:

Your customer is ready to retire next month. She wants to receive a monthly check for as long as she lives, but she is not impressed with the low rates of return on the fixed annuity illustration you walked her through last week. She has concerns about purchasing power and has a moderate risk tolerance; therefore, she would most likely be interested in which of the following?
A. deferred variable annuity
B. immediate variable annuity
C. deferred indexed annuity
D. immediate fixed annuity

EXPLANATION: as always, what can we eliminate? The phrase "ready to retire next month" eliminates choices A and C--deferral periods are perhaps 10 years long; this person wants  payments immediately. Now, while I would prefer the immediate FIXED product; this individual clearly wants the VARIABLE annuity so she can be partly invested in stocks. Right? The answer is B here, no doubt about it. Get Series 7 Practice Questions Here


  1. shouldn't she buy an immediate FIXED annuity, since they pay a guaranteed minimum rate of return?

  2. the question says she isn't impressed with the paltry returns, and she worries about inflation or purchasing power. She needs to be in the stock market, right?

  3. right--so, how about an equity indexed annuity? That's tied to the stock market, the S&P 500!

  4. that product is a fixed annuity--the individual makes only part of the upside when the stock market does well and can only have the contract increase by so much in any year. Really, those products are all about downside protection--the VARIABLE annuity offers upside/inflation protection/growth.