How Annuities Are Regulated

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There are three fundamental different annuity types: fixed, variable, and indexed annuities. Many people believe that all annuities are regulated the same way. However, they are not. The annuity regulation involved depends on the type of annuity product. If youre considering purchasing an annuity, it is important to understand how the different types of annuities are regulated.

Fixed annuities earn interest at a set rate during the accumulation period of the annuity. During the payout period, again, the income payments are made to the investor at a fixed rate. With a variable annuity, the investor uses their contributions to invest in mutual funds or another underlying investment vehicle. The variable annuity payouts are then based on the underlying investment vehicles performance. An indexed annuity is designed to mirror the performance of a financial index.

Variable annuities and some indexed annuities are considered securities and are, therefore, regulated by the Securities and Exchange Commission (SEC) and the National Association of Security Dealers (NASD). Indexed annuities usually combine some of the features of a security and some of the features of a traditional insurance product. Depending on this mix, an indexed annuity may be considered a security and regulated by the SEC.

Securities are not guaranteed like bank deposits and can lose as well as gain value. The SECs goal is to insure that all security investors have access to the basic facts about an investment. To achieve this, the commission requires that financial data and other security information are made available to the public. For example, all variable annuity investors must receive a prospectus prior to signing the contract. The SEC also monitors security exchanges, brokers and dealers, advisors, and mutual funds to protect investors against fraud.

Anyone who sells an annuity that is considered a security is required to have a Series 6 or Series 7 license by the federal government. Depending on the state, a state license may also be required. The person selling a security annuity is also required to make sure that the product is a suitable choice for the purchaser.

The final organization involved in security annuity regulation is the Financial Industry Regulatory Authority (FINRA). FINRA is an independent self-regulatory group that regulates the securities industry.

Fixed annuities offer a guaranteed rate of return. For this reason, fixed annuities, and most indexed annuities, are considered insurance products, not securities. Therefore, the individual state department of insurance has regulation authority over fixed and most indexed annuities. The state organizations also have authority over variable annuities in addition to the SEC.

The National Association of Insurance Commissioners (NAIC) is a national organization of all of the state insurance regulators. The NASD also sometimes unofficial regulates variable and indexed annuities because it requires member firms to monitor all the products their advisors sell.

All annuities are not the same, and all annuity regulation is not the same. It is important to understand what group is involved in the regulation of the particular annuity of interest before it is purchased.
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