5.2 Annuities
Annuities protect against longevity risk (outliving one's assets). Variable annuities offer tax-deferred growth in subaccounts but carry surrender charges, mortality expenses, and market risk.
Key NASAA Exam Takeaways
- Fixed Annuities offer guaranteed payouts backed by the general account and are NOT securities.
- Variable Annuities invest in separate accounts (subaccounts) and ARE securities requiring Series 6 or 7 registration.
- Equity-Indexed Annuities (EIAs) credit returns linked to a benchmark index (e.g., S&P 500) subject to participation rates and caps.
- Non-qualified annuity withdrawals prior to age 59 1/2 are taxed on a LIFO (earnings first) basis plus a 10% penalty.
- Section 1035 Exchanges allow tax-free transfers between like insurance contracts without recognizing capital gains.
Knowledge Checkpoint • Section 5.2
An investor invested $100,000 into a non-qualified variable annuity. The contract value grows to $160,000. At age 52, the investor withdraws $40,000. How is this withdrawal taxed?