Investing in Insurance and Annuity Products at Stifel

Insurance products offered at Stifel include annuities, life, long-term care and disability insurance. Insurance is a contract between the investor and an insurance company. One of the more popular insurance products is the annuity contract.

There are two main types of annuities, immediate and deferred. An immediate annuity begins making payments from the investment principal (assets) and income that may be earned to the investor immediately after the initial investment has been made. A deferred annuity delays making payments, allowing the potential for any income or gains to accumulate on a tax-deferred basis, until withdrawals are initiated (generally after a longer-term holding period). In addition to the two types of annuities, immediate and deferred, there are also three categories of annuities, fixed, indexed, and variable. A fixed annuity contract has a set interest rate return that is "fixed" for a stated period of time. The interest rate and payment of investment principal are backed by the ability of the issuing insurance company to pay the amounts from their resources. An indexed annuity contract credits interest that is linked to a stock market index. Your participation in any gain experienced by the index will be limited due to caps, spreads, and/or participation rates that are declared by the insurance company. A variable annuity generally offers the ability to invest the assets in the annuity contract in the market through sub-accounts (held within the annuity) that invest in the securities markets. There are generally diversified investment objective options available with varying levels of investment risk to meet differing investor's objectives and risk tolerances. An investor can change the sub-account allocations, but most insurance companies limit how many times sub-account changes can be made per year. Because variable annuities invest in securities, the returns in the assets will vary and can be negative. The returns with a variable annuity will depend upon the investment performance of the sub-account(s) that are selected by the investor. For additional information on the three types of deferred annuities in the marketplace today, please click here for the NAIC “Buyer’s Guide for Deferred Annuities”

Important Considerations

As with any investment decision, it is important to consider a number of factors before making an investment in an annuity. Because there are various features, benefits, limitations, early surrender charges, penalties, and possible tax implications that may apply to a particular annuity and, in many cases, the assets invested in the underlying annuity sub-account(s) are subject to current fluctuation due to market risk, it is important to read the prospectus, contract, statement of additional information, and offering material, and to discuss your particular needs and circumstances with your Financial Advisor to determine the type of annuity that may be best suited for your investment needs. Not only should you consider the risks and objectives of the annuity and match them to your own goals and risk tolerance, but you should also understand the costs associated with your investment and how Stifel and your Financial Advisor are compensated on that investment. Stifel's overall annuity company relationships consists of selling agreements with over 41 insurance companies representing over 321 annuity choices to meet the diverse needs of our clients.

Investors should obtain a prospectus for an annuity's contract and the underlying subaccounts and consider the investment objective, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other important information, is available from your Financial Advisor and should be read carefully before investing.

Annuities are long-term financial vehicles designed for retirement purposes and have varying degrees of expenses, fees, and investment risks. All withdrawals of taxable amounts, including earnings, are taxable as ordinary income. Withdrawals may be subject to surrender charges, and if made prior to age 59 ½, may be subject to a 10% federal tax penalty. Insurance carriers reserve the right to enforce a maximum age when income must start.

Variable annuities are not insured by the FDIC or any government agency and involve market risk, including the possible loss of principal. Variable annuities entail fees, such as mortality and expense charges and optional benefit rider charges. Annuities purchased with qualified funds offer no additional tax benefits than those already available through a qualified plan. Guarantees are based on the claims-paying ability of the issuing insurance company.

Annuity Service, Support, Operating Costs, and Expenses

Annuity contracts carry several different types of fees and charges. It is important to understand all of the expenses and limitations before you invest, as they will reduce the overall value and reduce the return on your annuity investment. While each annuity contract may have different combinations of features and benefits, which may therefore have differing overall charges, annuity contract fees, costs and expenses generally include the following:

  • Surrender charges - If you withdraw money from an annuity contract or liquidate the entire annuity contract ("surrender") within a certain period of time after investing, with limitations as set by the issuing insurance company generally ranging from three to ten years, the insurance company may assess a surrender charge. The surrender charge is a type of redemption fee and is generally a percentage of the investment amount that is being withdrawn. The surrender charge percentage typically declines gradually over the surrender charge period, until the end of the surrender charge period, after which there will be no charge to withdraw or liquidate (although tax implications may apply, see below for a general discussion). Please note that surrender charge periods typically apply to the amount of each new investment in the annuity contract. Therefore, any new investments and/or additions to a contract may initiate a new surrender charge for that investment amount. Many annuity contracts, however, do allow for a partial withdrawal of funds of up to ten percent or more on an annual basis, without a surrender charge.

  • Mortality and expense charge - The mortality and expense charge is to compensate the insurance company for the insurance risks that it assumes under the insurance contract and can be used by the insurance company to offset the costs of selling the variable annuity, such as a commission paid to your Financial Advisor for selling the variable annuity to you. The annual mortality and expense charge is equal to a percentage of your account value, typically ranging from 0.90 percent to 1.80 percent per year.

  • Sub-account expenses - Fees and expenses are also charged on the underlying investment options, called sub-accounts, in a variable annuity. The fees and expenses of the sub-accounts include annual operating expenses, such as management fees, 12b-1 (distribution) fees, cost of shareholder mailings, and other expenses. Sub-account expenses are charged as a percentage of the account value annually and can range from no charge (typically for money market sub-accounts) to as much as 2 percent per sub-account selected.

  • Administrative fees - The insurance company may deduct charges from your annuity contract to cover record-keeping and other administrative expenses. This may be charged as a flat account maintenance fee (perhaps $25 or $30 per year) and/or as a percentage of your account value (typically about 0.15 percent per year). Some insurance companies waive the flat account maintenance fee on larger account values.

  • Other fees and charges for additional features - Some annuity contracts offer features and benefits that may carry additional fees and/or charges, such as a stepped-up death benefit, a bonus credit feature, a guaranteed minimum income benefit, a guaranteed minimum withdrawal benefit, a guaranteed minimum accumulation benefit, or an earnings enhancement benefit (the term "guaranteed" refers to the payments being backed by the ability of the issuing insurance company to pay for those benefits out of that insurance company's assets. In addition, some annuity contracts charge an account maintenance fee, sub-account investment transfer fees, an annual contract fee and/or an account maintenance fee.

Because of the different features and benefits available with the different type of annuities, the costs involved and the longer-term nature of most annuity contracts, it is important to read the prospectus, annuity contract, statement of additional information and offering material, along with discussing your particular needs and circumstances with your Financial Advisor to determine the type of annuity that may be best suited for your investment needs.

How Compensation Is Paid to Stifel and Your Financial Advisor

Stifel and our Financial Advisors receive compensation when clients invest in insurance products that are paid by the insurance company out of its assets, which may include any profits the insurance company makes on insurance contracts. Depending upon the type of insurance product and Stifel's agreement with the insurance company, our compensation can vary and be in the form of one or a combination of upfront commissions, concessions on an ongoing basis (based on the value of the assets commonly known as trail commissions), when additional investments are made to an insurance contract, at contract renewal, for expense reimbursements, or at the time of annuitization of a contract.

The ongoing fees or trails Stifel and your Financial Advisor may receive from an insurance company are based upon the amount of your investment held with the insurance company and are paid in consideration of the ongoing servicing and operational support provided. You should discuss with your Financial Advisor the form of compensation he or she receives. Stifel's compensation formula does not favor one insurance company's products over another, and all commission revenue is paid out to the Financial Advisor on the same basis, similar to any commission revenue received by the firm.

Our representatives may also directly or indirectly receive additional cash and non-cash compensation. Such support is used for general business and marketing purposes, such as seminars, training conferences, and other promotional activities.

Focus Companies

Stifel offers a large number of annuity products from many quality insurance companies. All of the companies with selling agreements are not limited in their access to meet and work with our Financial Advisors. In order to better utilize our available resources, we focus our marketing and training efforts towards the products offered by a select number of those insurance companies. These focus vendor companies are selected based upon factors that include whether they offer competitive market-leading products, superior service to our Financial Advisors, a quality level of customer service, maintain high credit ratings as defined by the major rating agencies, and based on an evaluation of their training and education abilities.

It is anticipated that the focus vendors make regular visits with our Financial Advisors throughout Stifel's branch system, support continuing education and training meetings, support seminar presentations, are available to meet with clients to present products, and will provide up-to-date marketing and promotional materials that are compliant with industry regulations. Focus vendors will have more opportunities than other insurance companies to provide our clients and Financial Advisors information and make presentations of their products, and they may also attend or sponsor training, educational, or promotional meetings for our Financial Advisors and/or employees. Focus vendors may pay additional amounts to Stifel as compensation for these training, educational, and promotional efforts. Our Financial Advisors are not required to recommend any product of an insurance company that provides additional compensation, nor do they directly share in any of the marketing support fees received.

Other Compensation Stifel May Receive

In consideration for marketing and operational support services provided and additional costs that may be borne by Stifel, insurance companies may pay Stifel additional compensation, benefits, or contributions from their ongoing fees, operating costs, past profits, or other company resources. The marketing and support services may include processing and operations support, telephone and computer services, conference rooms, facilities, personnel, training, educational meetings, Financial Advisor compensation, publications, marketing and/or promotional activities, or other materials relating to annuities. While not all insurance companies pay additional marketing and support fees to Stifel (some pay none), the compensation for those that do may be a fixed dollar amount, an amount paid based on sales of up to 0.15% of purchases, an amount based on assets held of up to 0.05%, or a combination of these.

Our Financial Advisors are not required to recommend any product of an insurance company that provides additional compensation, nor do they directly share in any of the marketing support fees received.

Stifel may also, on occasion, receive commissions or other revenues as compensation for executing transactions on behalf of annuities.

Potential Tax Implications With Annuities

Although annuities generally allow your investment to be held on a tax-deferred basis, you should be aware of certain tax issues before you purchase an annuity. For example:

  • Withdrawals from annuities, including partial withdrawals and surrenders, may be taxable. If you take a taxable withdrawal before age 591/2, you may have to pay a 10 percent penalty to the IRS on the amount of the gain in your contract, in addition to your normal income taxes.

  • Taxable distributions from an annuity are generally taxed at the contract owner's ordinary income tax rate and do not get the benefit of lower tax rates received by certain capital gains and dividends under current tax laws.

  • If an annuity contract is owned by a non-natural entity (such as a corporation, partnership, or LLC), the contract is generally not eligible for tax-deferral.

  • The death of a contract owner (or in some cases, the death of an annuitant) may result in taxable distributions that must be made from the contract within a specified period of time.

  • Upon the death of the owner/annuitant of a contract, gains may be taxable to the beneficiary; the annuity assets may be included in the owner's estate; there is no step-up in the tax basis; and annuity assets will bypass probate, unless the contract owner's estate is the named beneficiary or no beneficiary is named.

  • The tax-deferral benefit offered by annuities provides no additional tax benefit if they are held in tax-qualified accounts such as an IRA, 403(b), or 401(k). Special rules governing annuities issued in connection with a tax-qualified retirement plan restrict the amount that can be contributed to the contract during any year.

Please consult your tax advisor and consider all the tax consequences before purchasing an annuity.

Additional Information

Please discuss your particular needs and circumstances with your Financial Advisor as you are evaluating the available features, benefits, and costs involved to determine the type of annuity that may be best suited for your investment needs. It is also important to read the prospectus, annuity contract, statement of additional information, and offering material. For additional information on annuities, reference the following web sites: The FINRA (www.FINRA.org), the Securities and Exchange Commission (www.SEC.gov), Insured Retirement Institute (www.irionline.org), the National Association of Insurance Commissioners (www.NAIC.org), or your state's Insurance Department.