The Basics

NOTICE TO MEMBERS 05-50

In August of 2005, FINRA (formerly the NASD) issued the “Notice to Members 05-50.” This notice suggested that broker/dealers (B/Ds) treat Indexed Annuities as if they were securities, despite their Fixed insurance status. For agents not selling securities products, NTM 05-50 did not affect their sales routine. Alternatively, agents with securities licenses were forced to change their sales practices in regard to Indexed Annuities. This meant that an agent’s B/D needed to approve the Fixed insurance product that he wanted to offer his client, despite the fact that FINRA had no regulatory authority over Indexed Annuities. Today, most securities licensed agents must sell from an “approved list” (also known as a “short list”) of Indexed Annuities, and pay a portion of their commissions to their B/D for the oversight provided by the firm. Fortunately, an agent who sells Indexed Life, securities licensed or not, need not worry about short lists of approved products and losing a portion of their commissions. Yet.

So hopefully you now understand what an Indexed Life product is, who can sell it, and who regulates it. You should also understand quite clearly what an Indexed Life product is not. It is not an alternative to a Variable Universal Life product, as Indexed Life is a safe money place. Variable Universal Life is a risk money place. Indexed Life would be more appropriately viewed as an alternative to Universal Life, Interest-Sensitive Whole Life, or other fixed-rate insurance products.

In the past, Indexed products have received their share of negative media attention. This is primarily because of perceived complexity associated with the products. In an effort to differentiate the many products that are available for sale today, insurance carriers have invented new methods of calculating potential interest crediting. At times, these methods are over-whelming to both the agent and client. Fortunately, the Indexed Life market has less than half of the crediting methods available than in the Indexed Annuity market. In addition, the majority of strategies available with Indexed Life products (and even with their Annuity brethren) are based on very simple math (point-to-point, monthly and daily averaging, and fixed strategies).