6.1 Annuity Basics

Series 7 General Securities Representative

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1 Introduction

About the Series 7 How to Use This Guide

2 Chapter 1: Equity Securities

1.1 Common Stock Basics 1.2 Dividends and Stock Splits 1.3 Preferred Stock 1.4 Rights and Warrants 1.5 ADRs and Foreign Securities

3 Chapter 2: Debt Securities

2.1 Bond Fundamentals 2.2 Bond Yields and Pricing 2.3 Corporate Bonds 2.4 Bond Features and Risks

4 Chapter 3: U.S. Government & Agency Securities

3.1 Treasury Securities 3.2 Agency Securities 3.3 Mortgage-Backed Securities 3.4 Money Market Instruments

5 Chapter 4: Municipal Securities

4.1 Municipal Bond Basics 4.2 General Obligation Bonds 4.3 Revenue Bonds 4.4 Municipal Bond Analysis 4.5 Municipal Securities Rules

6 Chapter 5: Investment Companies

5.1 Investment Company Basics 5.2 Mutual Funds (Open-End Funds) 5.3 Mutual Fund Pricing and Fees 5.4 Closed-End Funds and ETFs 5.5 Investment Company Taxation

7 Chapter 6: Variable Products & Annuities

6.1 Annuity Basics 6.2 Variable Annuities 6.3 Annuity Taxation 6.4 Variable Life Insurance

8 Chapter 7: Alternative Investments & DPPs

7.1 Direct Participation Program Basics 7.2 Types of DPPs 7.3 DPP Suitability and Risks 7.4 Real Estate Investment Trusts (REITs) 7.5 Hedge Funds and Other Alternatives

9 Chapter 8: Options

8.1 Options Basics 8.2 Long and Short Option Positions 8.3 Hedging Strategies 8.4 Spreads and Combinations 8.5 Index and Non-Equity Options 8.6 Options Account Requirements

10 Chapter 9: Customer Accounts

9.1 Account Types 9.2 Cash Accounts 9.3 Margin Accounts 9.4 Margin Calculations 9.5 Fiduciary and Institutional Accounts

11 Chapter 10: Retirement & Education Plans

10.1 ERISA and Qualified Plans 10.2 Defined Benefit vs. Defined Contribution 10.3 Individual Retirement Accounts 10.4 Education Savings Plans 10.5 Plan Distributions and Taxation

12 Chapter 11: Securities Markets & Trading

11.1 The Primary Market 11.2 The Secondary Market 11.3 Order Types and Execution 11.4 Trade Settlement and Reporting 11.5 Market Participants

13 Chapter 12: Rules, Regulations & Ethics

12.1 Regulatory Framework 12.2 Suitability Requirements 12.3 Communications with the Public 12.4 Prohibited Activities 12.5 Customer Protection Rules 12.6 Ethics and Professional Conduct

6.1 Annuity Basics

Key Takeaways Explain This Topic AI

An annuity is an insurance contract that converts a lump sum or stream of premiums into guaranteed lifetime income, hedging longevity risk.

Fixed annuities live in the insurer's general account, carry a guaranteed minimum rate, and are NOT securities (state-insurance regulated only).

Variable annuities use a separate account, shift investment risk to the owner, and ARE securities (SEC-registered, FINRA-regulated).

Immediate annuities begin payout within 12 months of a single premium; deferred annuities have an accumulation phase first.

Every annuity has two phases: accumulation (pay-in, reversible) and the annuity/payout phase (annuitization is generally irreversible).

Last updated: October 2026

What an Annuity Is

An annuity is a contract between an investor and an insurance company in which the investor pays premiums and the insurer promises a future stream of income. The core purpose tested on the Series 7 is longevity risk management — the danger of outliving your money. Annuities are the only retail product that can pay income for the rest of an investor's life no matter how long that is.

Variable products represent a meaningful slice of the Series 7's 125 scored questions (225 minutes, a scaled passing score of 72, $395 fee through Prometric/FINRA). Because variable annuities are securities , the exam expects you to separate insurance features from securities features precisely.

Fixed vs. Variable Annuities

Feature Fixed Annuity Variable Annuity
Where premiums go General account Separate account
Return Guaranteed minimum rate Subaccount performance
Who bears investment risk Insurer Contract owner
Inflation protection Weak (purchasing-power risk) Stronger (equity-linked)
Is it a security? No Yes (SEC registered)
Regulator State insurance dept. SEC + FINRA and state insurance
License to sell State insurance only Insurance + Series 6/7 + 63/66

A fixed annuity guarantees principal and a floor rate but exposes the owner to purchasing-power (inflation) risk : a level $1,200/month check buys less every year. A variable annuity ties value to subaccounts so income can rise with markets, trading inflation risk for investment risk borne by the owner.

Immediate vs. Deferred

Feature Immediate Annuity Deferred Annuity
Premium Single lump sum Single or periodic
Payout begins Within 12 months Future date (years out)
Accumulation phase None Yes
Typical use Income now (e.g., new retiree) Retirement savings build-up

An immediate annuity (a Single Premium Immediate Annuity, or SPIA) is bought with one lump sum and starts paying within a year — there is no accumulation phase. A deferred annuity accumulates tax-deferred for years, then annuitizes later. Watch the trap: an immediate annuity must be a single premium, so a client who wants to contribute monthly over time needs a deferred product, not an immediate one.

The Two Phases
Accumulation Phase (pay-in)

The owner contributes; value grows tax-deferred ; in a variable contract the owner buys accumulation units . The owner can still surrender or withdraw (subject to charges/penalties). No income is paid.

Annuity/Payout Phase

At annuitization the contract converts accumulation units into a fixed number of annuity units , and income begins. Annuitization is generally irreversible — a common exam point.

Payout (Settlement) Options — ranked by check size

Option Description Relative monthly check
Straight life (life only) Pays until annuitant dies; nothing to heirs Highest
Life with period certain Life income, guaranteed min. years (e.g., 10/20-yr) Lower
Joint and last survivor Pays until BOTH annuitants die Lowest

Worked example: A 67-year-old wants the biggest possible check and has no dependents. Straight life pays the most because the insurer's obligation ends at death with no residual guarantee. If she instead chooses joint-and-survivor with a spouse, the insurer expects to pay over two lifetimes, so each check shrinks.

Common traps: (1) Fixed annuities are NOT securities — do not say they require a Series 7. (2) The owner, annuitant, and beneficiary can be three different people; the annuitant is the measuring life for payout. (3) "Tax-deferred" is not "tax-free."

Parties to the Contract

The Series 7 expects you to keep three roles straight. The owner controls the contract, makes premium decisions, names the beneficiary, and is taxed on withdrawals. The annuitant is the measuring life whose age and life expectancy set the payout amount and on whose death a life-contingent payout ends. The beneficiary receives any death proceeds. On most retail contracts the owner and annuitant are the same person, but exam questions deliberately split them — for example, a parent (owner) buying a contract on a child (annuitant). Remember: payout size is always computed from the annuitant's life expectancy, not the owner's.

Bonus, Indexed, and Hybrid Variations

Beyond the core fixed/variable split, expect to recognize a few named variations. An equity-indexed (or fixed-indexed) annuity credits a return tied to an index such as the S&P 500 but with a participation rate and a cap , plus a guaranteed floor (often 0%); it is generally treated as a fixed product (not a security) for licensing. A bonus annuity adds a premium credit but usually carries a longer surrender schedule — a suitability flag. A combination annuity blends a fixed account with variable subaccounts.

The unifying exam idea: the more of the return that depends on a separate account, the more it looks like a security and the more investment risk shifts to the client.

Suitability Snapshot

Before recommending any annuity, document the customer's time horizon, liquidity needs, tax bracket, existing retirement coverage, and risk tolerance. Annuities are long-term vehicles; recommending one to a client who needs the money within the surrender period, or who has not funded available qualified plans, invites a suitability violation. A variable annuity suits a client who wants tax-deferred, market-linked growth and a lifetime-income option and accepts investment risk; a fixed annuity suits a conservative client prioritizing principal protection over inflation defense.