Purchasing an annuity doesn’t have to be a nerve-racking experience. Because annuities can be purchased from insurance companies, several banks, and even a number of independent investment brokers and advisors, it’s widely believed that not much is done to oversee their sales.
The truth is that there are regulating bodies in charge of annuities, and many of them may even help you screen the companies you’re looking to purchase an annuity from.
All annuities: State insurance commission
Insurance companies that sell annuities must be licensed in all the states they operate in. They must show that they are ready to comply with requirements in terms of their finances, capital, and surplus. Their company management is also looked at to ensure that they have the right experience and values to serve clients.
Each state’s insurance commission is responsible for regulating every kind of annuity in their state. State insurance commissioners help monitor the practices of insurance companies in the interest of the public. They exist to protect customers and keep insurance companies up to standard.
The National Association of Insurance Commissioners (NAIC), a regulatory support organization led by chief insurance regulators nationwide, plays a role in these standards as they create the model laws that states are welcome to adopt or reject. According to the association, their regulations promote uniformity across the states.
You may contact your state insurance commissioner even if you have no complaints to report. Sometimes, there are just too many terms to take in and concepts to understand, it may seem like your insurance agent is speaking in a different language. You can always turn to your state insurance commissioner for unbiased information and even a second opinion, whenever you need it.
If you are encountering problems with your insurance company or are bothered by how they conduct business, contacting your state insurance commissioner is the way to go.
Variable annuities: SEC and FINRA
The Securities and Exchange Commission (SEC) and the Financial Industry and Regulatory Authority (FINRA) are responsible for regulating variable annuities. This means that anyone who attempts to sell you variable annuities must be licensed through the SEC and should be able to present proof of this license to you.
While fixed annuities offer a specific and guaranteed return, the value of variable annuities depends on the performance of the investments you choose, mostly composed of mutual funds. According to the SEC, variable funds differ from mutual funds because they are tax-deferred, allow for periodic payments, and offer a death benefit. Indexed annuities, with returns dependent on a market index, may also be a security registered with the SEC. However, most are not and fixed interest annuities do not need to be registered with the SEC, either.
The SEC operates under the Securities And Exchange Act of 1933, Securities and Exchange Act of 1934, and the Investment Company Act of 1940. These laws protect investors by having the SEC approve registration statements and regulate broker dealers and investment companies.
FINRA also supervises registered broker dealers and regulates their interactions with the public. Both FINRA and the SEC aim to protect investors from financial fraud and abuses.
State Guaranty Association
Aside from state insurance commissioners, the SEC, and FINRA, state guaranty associations may also help you. Each state has a guaranty association, a nonprofit organization that insures annuities and other insurance products in case consumers’ insurance companies become insolvent.
If you purchase your annuity from an insurance company, you’ll be covered by the state guaranty association because all insurance companies are required by law to be a member. All of the 50 states, plus Puerto Rico and the District of Columbia, have a guaranty association. Insurers registered in a state must contribute to the state’s guaranty fund. When an insurance company fails, their remaining assets are combined with the state’s guaranty fund to pay any outstanding claims.
The state can then pay claims but only up to a certain point. Every state has their own limits on coverage, so different states offer different coverage. For instance, Puerto Rico covers $100,000 of annuity benefits, Alabama covers $250,000, New Jersey covers $500,000, while New York covers as much as $1 million. These are numbers compiled by the National Organization of Life & Health Insurance Guaranty Associations, an organization made up of the guaranty associations across the entire country and the District of Columbia. The organization is tasked with coordinating the states’ guaranty funds, with the amounts based on a model law proposed by the NAIC.
If the company you purchase your annuity from becomes insolvent, you are entitled to coverage up to the state’s limit. It should be noted that it is very rare for a reputable insurance company to go under and become insolvent. If you buy annuities from two separate companies and both were to become insolvent, you would be entitled to coverage for each company policy. The state guaranty fund is meant to cover each customer per company. However, you could still file a priority claim against the company if you believe you are entitled to benefits above your state’s coverage limit, but you may have to wait until the company is liquid enough to pay you.
The NAIC
Behind the scenes, the NAIC continues to look out for the average consumer by passing regulations to ensure proper transactions. Their Suitability in Annuity Transactions Model Regulation states that producers must act in the best interest of consumers when recommending the purchase of annuities. It also requires insurers to have a system to supervise these recommendations so that consumers’ needs are met.
The Annuity Disclosure Model Regulation requires that producers disclose certain information about annuity contracts to consumers. This is for the protection and education of consumers, who should “understand certain basic features of annuity contracts.”
They also organized the Annuity Suitability Working Group in 2017 to review and revise the Suitability in Annuity Transactions Model Regulation to promote greater uniformity among their members. In February 2020, their updates to the regulation were approved, further clarifying that all annuity agents must put their consumers’ interest ahead of their own. The association asks that agents exhibit “reasonable diligence, care and skill” while educating consumers about the products they sell. Consumers must also be made aware of any conflicts of interest.
Despite all these regulators, feeling secure about your annuity purchase still comes down to the research you put into finding the right annuity provider. Sometimes, all you have to do is check the records on your state insurance website.