The national guide explains how annuities work:

• phases: accumulation and payout;
• types: fixed, variable and indexed; immediate and deferred;
• payout options, surrender charges and 1035 exchanges.

Illinois's state questions on annuities focus on the annuity best interest rule (50 Ill. Adm. Code 3120), the training requirement, the standard annuity provisions (215 ILCS 5/226), and the licensing needed for variable annuities.

National concepts in brief

• The annuitant is the measuring life; the owner controls the contract.
• Taxation: under the exclusion ratio, each annuity payment is partly a tax-free return of basis and partly taxable gain (26 U.S.C. 72(b)).
• Variable annuities put investment risk on the owner.

Best interest (50 Ill. Adm. Code 3120)

Since 2023, a producer recommending an annuity must act in the consumer's best interest, without putting the producer's or insurer's financial interest first (3120.50(a)). The standard has four obligations:

1. Care. Know the consumer's profile and have a reasonable basis for the recommendation. For an exchange or replacement, the producer considers any other exchange or replacement in the past 60 months.
2. Disclosure. Describe the sources and types of cash and non-cash compensation. On request, give a reasonable estimate of cash compensation, which may be a range, and say whether it is one-time or recurring.
3. Conflict of interest. Identify and avoid material conflicts, or reasonably manage and disclose them.
4. Documentation. Record the recommendation. If the consumer refuses to provide profile information, they sign a statement acknowledging the consequences.

Supervision: insurers must have procedures to eliminate sales contests, quotas, bonuses and non-cash compensation tied to specific annuities within a limited period (3120.50(c)).

Records: consumer information, disclosures and the basis for recommendations are kept for 7 years after the transaction (3120.80).

Training: a one-time 4-hour annuity training course approved by the Department is required before selling annuities (3120.60).

Required annuity provisions (215 ILCS 5/226)

Licensing for variable annuities

• Selling registered variable annuities requires a life producer license plus a variable contract license.
• The variable contract license is issued on proof of passing FINRA Series 6 or 7 (50 Ill. Adm. Code 1551.90).

Related protections

• Guaranty association: the Illinois Life and Health Insurance Guaranty Association protects annuity values up to $250,000 in present value. Structured settlement payees are also protected to $250,000 (215 ILCS 5/531.03).
• Not protected: portions of variable contracts that the insurer doesn't guarantee.
• The association may not be used as a sales inducement (215 ILCS 5/531.19).
• Replacement: the replacing insurer gives a 20-day free look (215 ILCS 5/224(2)).

Common exam traps

• Illinois annuity best interest records are kept 7 years.
• Annuity training is a one-time 4-hour course.
• Variable annuities need a separate variable contract license, based on Series 6 or 7.
• Annuity reinstatement runs one year at no more than 6% interest.
• The look-back for prior exchanges is 60 months.