SIE Ready🧺 Packaged Products · Lesson 7 of 7 · 5 min
Fixed vs Indexed Annuities and Variable Life
🛡️ The word 'annuity' covers products that are securities and products that are not. Who carries the investment risk tells you which is which.
💡 Key idea
Insurer bears the risk = fixed annuity, not a security. Investor bears the risk = variable product, a security needing both licenses.
🧠 Why it matters
In a FIXED ANNUITY the insurer guarantees the rate and carries the investment risk in its general account, so it is an insurance product, not a security; an insurance license alone is needed. An INDEXED ANNUITY credits interest linked to an index, limited by a PARTICIPATION RATE, CAP or SPREAD. Example: 80% participation on a 10% index gain credits 8%; with a 6% cap, only 6%. State insurance regulators oversee all indexed annuities, and the SEC oversees those that are securities. VARIABLE LIFE insurance invests premiums in a separate account: cash value (and possibly the death benefit above a guaranteed minimum) varies with performance. Variable annuities and variable life are securities, so selling them requires FINRA registration AND a state insurance license.
📈 In the real world
📋 Carla has an insurance license and wants to sell her customers a variable life policy. Her compliance officer stops her: because the policy's cash value rides on subaccounts, it is a security. She needs the SIE, a qualifying exam and broker-dealer registration before she can offer it.
📌 Takeaways
- Fixed annuities: guaranteed by insurer, not securities
- Indexed annuities: crediting limited by participation rates, caps or spreads
- Variable life: cash value varies; minimum death benefit; securities plus insurance license
📖 Terms in this lesson
Fixed annuity: An insurance contract paying a rate guaranteed by the insurer, regulated as insurance rather than as a security.
✅ Test yourself
Why is a traditional fixed annuity not considered a security?
- The insurer bears the investment risk
- It can be bought only inside an IRA
- It pays no death benefit to heirs
- It is sold only by bank employees
Answer: A · The insurer bears the investment risk
With a fixed annuity, the insurer guarantees the return from its general account and bears the investment risk, so it is regulated as insurance. Account type, death benefits and who sells it do not determine securities status.
An indexed annuity has a 70% participation rate and no cap. The index gains 10%. What is credited?
- 3%
- 17%
- 10%
- 7%
Answer: D · 7%
Participation rate × index gain = 70% × 10% = 7%. 10% ignores the participation rate, 3% is the portion not credited, and 17% wrongly adds the numbers.
In a variable life policy, which element varies with the performance of the separate account?
- The policy's original issue date
- The cash value of the policy
- The insured's age at issue
- The guaranteed minimum death benefit
Answer: B · The cash value of the policy
Variable life cash value rises and falls with the separate account's subaccounts. The minimum death benefit is guaranteed by definition, and issue date and age are fixed facts of the contract.
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