People may not understand that they get one set of protections when buying a fixed annuity, a different set of protections when buying a variable annuity and an unclear set of protections when buying an indexed annuity. The three annuity types are really three versions of the same product; however, there is no uniform set of rules on suitability standards, supervision and training of salespeople, disclosures or advertising even though consumers often buy all three types of annuities for the same reasons. Consequently, the level of disclosure and protection investors receive varies depending on which agency regulates the version of the product they're buying. In this article, we'll show you who regulates these products, how it is done and what you need to know before you buy them.

Who Regulates What?
Fixed Annuity
A fixed annuity offers the security of a guaranteed rate of return. This will be true regardless of whether the insurance company earns a sufficient rate of return on its own investments to support that rate. (To read more on fixed annuities, see Exploring Types Of Fixed Annuities, Personal Pensions: Repackaging The Annuity and Anything But Ordinary: Calculating The Present And Future Value Of Annuities.)Your state department of insurance has jurisdiction because fixed annuities are insurance products. Also, your insurance commissioner requires that advisors have a license to sell fixed annuities.

Variable Annuity
With a variable annuity, you receive varying rates of return depending on your portfolio's performance. A variable annuity is considered a security under federal law and is subject to regulation by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD). Anyone selling a variable annuity must have an Series 6 or Series 7 license, and your state may require one as well.

Potential investors must receive a prospectus. In addition, the person offering the product must be sure that the variable annuity is a suitable choice for you. (To continue learning about variable annuities, read Getting The Whole Story On Variable Annuities, Passing The Buck: The Hidden Costs Of Annuities, and Taking The Bite Out Of Annuity Losses)

Indexed Annuity
An indexed annuity (IA), also called an equity-indexed annuity or a fixed-indexed annuity, is a fixed deferred annuity that credits earnings based on the movement of an index, such as the S&P 500. It also guarantees a certain minimum return. This allows you to participate in stock market gains without assuming the risk of losing money when the market declines.

Indexed annuity sales are a jurisdictional jump-ball - they could go either way. While variable annuities are subject to NASD regulation and fixed annuities fall to state insurance commissioners' regulation, IAs are subject to ambiguous regulation. It isn't clear to anyone whether they're insurance products or securities, even though they may look like the other annuities to investors. As you can imagine, this has created much controversy among regulators and the insurance industry.

At the moment, because insurers bear the financial risk, IAs are regulated by state insurance commissioners as insurance products, and agents must have a fixed annuity license to sell them. However, the NASD requires that its member firms monitor all products their advisors sell. Furthermore, the regulator has issued an investor alert on index annuities.

Therefore, if you deal with an NASD member firm, you might have another set of eyes unofficially watching the transaction.

What to Do When you Have a Complaint
If you have a complaint against an advisor or agent regarding your annuity, first talk to him or her about it. If this doesn't resolve the issue to your satisfaction, there are subsequent steps you can take:

Fixed and Indexed Annuities
The National Association of Insurance Commissioners (NAIC) website will take you to your state's complaint page. The majority will let you file your complaint online.

Although the typical indexed annuity is not registered with the SEC, it would like to be informed about any complaint you may have. Just fill out the online complaint form.

Variable Annuities
At the NASD Investor Complaint Center you can find out how to decide whether your complaint is legitimate and how to proceed.

Before You Buy
Make sure the company and advisor are properly licensed.

Fixed and Indexed Annuities
Access your state's insurance commissioner's website through the NAIC's map. From there, you can search for licensing information on the company and agent you are considering doing business with across the nation.

Variable Annuities
To check out a variable annuity seller, go to the NASD's investor protection page. Here you can find out which licenses he or she holds and certain background information, including:

  • Criminal events (e.g., felony convictions, certain misdemeanor charges and convictions, such as theft of money, bribery, etc.)
  • Financial disclosure events (e.g., bankruptcies, unsatisfied judgments and liens)
  • Regulatory actions (e.g., suspensions, bars)
  • Customer complaints, certain consumer-initiated arbitrations
  • Civil judicial events (e.g., injunctions)

Deferred annuities can be an excellent way to accumulate money for the future. The possible features include tax-deferred earnings, a guaranteed death benefit for your love ones and the opportunity to receive market-related returns. Despite their advantages, however, they are not for everyone.

Before you buy, consider the following questions:

  • Will you use the annuity primarily to save for retirement or a similar long-term goal?
  • Are you investing in the annuity through a retirement plan or an IRA? If yes, do you realize that you will not receive any additional tax-deferral benefit? (To learn more about retirement planning, see our Roth IRA, Introductory Tour through Retirement Plans and Retirement Planning Basics tutorials.)
  • In the case of a variable annuity, how would you feel if the account's value fell below the amount you had invested because the underlying portfolio performed poorly?
  • Do you understand all of the annuity's fees and expenses?
  • Do you intend to hold the annuity long enough to avoid paying surrender charges when you withdraw money?
  • Have you thought about how your tax liability might be affected when you begin taking withdrawals from the annuity?

When deciding between fixed, variable or indexed annuities, remember to research your goals and those of the companies involved. As an investor, you have access to plenty of information and it is your responsibility to ensure that you get a fair deal.

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