Annuity Regulations

While some have referred to annuity sales as the wild west, devoid of oversight, all annuities are regulated by state insurance commissioners. And variable annuities are also governed at the federal level by the Securities and Exchange Commission and the Financial Industry Regulatory Authority.

Elaine Silvestrini, Writer
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Annuities are contracts issued by insurance companies and marketed by different organizations and individuals with life insurance licenses. This includes banks, life insurance agents, stockbrokers, registered investment advisors and brokers.

If you are considering purchasing an annuity, you should have a general knowledge of how annuities are regulated. Use this information to research the company issuing your annuity and the person selling or recommending it. Many of the regulating bodies have tools you can use to find out the background of companies and brokers. You can also file complaints if you have a bad experience.

All types of annuities are regulated at the state level by each state’s insurance commission. Any insurance company that issues annuities must be licensed in every state in which it does business. State insurance commissioners monitor the finances of insurance companies and ensure that they follow requirements designed to protect customers from unsavory practices.

In addition to receiving state oversight, variable annuities are regulated at the federal level by the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Anyone selling variable annuities must carry a securities license.

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State Regulation of Annuity Sales

Annuities are regulated at the state level by the authorities that oversee life insurance. These insurance commissioners also license companies that offer annuities. Consumers can get information and file complaints about people and businesses registered to sell annuities through their state’s insurance commissioner.

Before being granted a license to sell annuities, an insurance company has to comply with strict requirements regarding capital, surplus and finances. States also investigate and monitor the experience and character of company management to ensure the company will protect the interests of its customers.

States generally adopt model laws created by the National Association of Insurance Commissioners (NAIC), which the association says promotes uniformity and consistency. The NAIC is a voluntary organization for state insurance regulatory officials. Its model laws and regulations are designed to encourage best practices. States are free to adopt them, modify them or reject them.

Updates to Suitability Standard

The NAIC’s Suitability in Annuity Transactions Model Regulation governs when a sales representative can recommend purchasing an annuity. The regulation, according to the association, is designed to “ensure the insurance needs and financial objectives of consumers are appropriately met at the time of the transaction.”

The NAIC is working on updating the suitability regulation following the demise of a federal rule that would have applied stricter standards to professionals who sell and recommend annuities. That U.S. Labor Department rule, known as the fiduciary rule, would have required such professionals to act as fiduciaries to their customers. In other words, it would have required them to put their customers’ interests before their own.

The rule was overturned by the courts before it was enacted. And now the Securities and Exchange Commission and state regulators are examining other ways to impose stricter standards on annuity transactions.

The NAIC has established an Annuity Suitability Working Group to hammer out a proposal that ensures that all annuity recommendations be in the interests of the consumer. A draft of the proposal would require that producers and insurers act with “reasonable diligence, care, skill and prudence” and “in the interests of the consumer at the time the recommendation is made, without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interests.”

The draft update would also require producers and insurers to document and explain clearly the basis for an annuity recommendation. Producers would be required to disclose and answer questions about their compensation and any material conflicts of interest.

The NAIC hoped to finalize the regulation model law update in 2019.

Model Law for Disclosure

The NAIC Annuity Disclosure Model Regulation requires the disclosure of certain information about annuity contracts. This is designed to protect consumers and encourage education of the public. In general, states require annuity contracts and forms to be filed and approved by the insurance commissioner or by the Interstate Insurance Product Regulation Commission to which more than 40 states belong.

In addition to regulating annuities, each state has a guaranty association that insures annuities and other insurance products in the event the issuing insurance company becomes insolvent. Each state’s guaranty association has its own limits, but all of them insure at least $100,000 per customer, per company.

State Insurance Websites

Before purchasing an annuity, you can check with your state insurance commission about the record of the insurance company that will issue it, as well as the company or individual who is recommending or selling it. You can also file complaints with the commissioners’ offices.

Each site is different, and you should be ready to look around to find what you need. As a general rule, annuity information is provided in the life insurance section of each website.

For example, on the New York State Department of Financial Services site, you would select Life Insurance under the consumer information tab. From there, select Annuity Products from the options on the left side of the page.

On the Florida Office of Insurance Regulation site, however, annuities are listed specifically under the tab for insurance types. That section includes searchable databases for information on companies that offer annuities.

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U.S. Treasury, the IRS and Annuities

One feature of annuities is that they are tax deferred. This means they are permitted to grow without the need to pay taxes on the increased value until the money is paid to the annuity holder.

The federal government has various rules that govern how this works. Consequently, the U.S. Treasury Department and Internal Revenue Service have a say in the operation and use of annuities. The IRS Publication 939 called General Rule for Pensions and Annuities explains taxation of annuities.

Over the years, the Treasury and the IRS have issued rules that have allowed for the creation of different annuity products.

For example, Qualified Longevity Annuity Contracts (QLACs) were created by rules issued by the Treasury in 2014 to help retirees manage their savings. QLACs are deferred annuities funded inside qualified retirement plans.

Federal Regulation of Variable Annuities: SEC and FINRA

Unlike fixed annuities, variable annuities are considered securities and are regulated by the SEC and FINRA. Variable annuities’ principal is placed in investment portfolios. The performance of the investments in the portfolios dictates the interest rates.

According to the SEC, indexed annuities, which have payout rates linked to the performance of an index such as the S&P 500, may or may not be securities. But most of them are not registered with the SEC.

Sales of variable annuities are a leading source of investor complaints to FINRA. The authority attributes the volume of complaints about variable annuities to their complexity and the confusion surrounding them, which can lead to what regulators deem questionable sales practices.

A FINRA rule governing variable annuities establishes standards for people who sell these products. Before recommending them, the representative “must make reasonable efforts to determine the customer’s age, annual income, investment experience, investment objectives, investment time horizon, existing assets, and risk tolerance.” In addition, the representative must have a reasonable basis to believe the customer would benefit from the annuity.

The SEC recommends that if you have a complaint about sales practices related to variable annuities, contact the FINRA District Office near where you live. The organization provides a list of FINRA District Offices on its website.

FINRA also has an online Broker Checker that you can use to look into the background of any broker or brokerage firm. The site will tell you whether a broker or firm is registered and give you information about a broker’s employment history, any actions taken by regulators, and information about licensing and complaints. Additionally, you can use the SEC Action Lookup – Individuals search feature to see if the SEC has brought a formal action against an individual.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: June 10, 2022

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