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.

Related Articles
  1. Retirement

    What Does It Cost to Retire in Panama?

    Learn how much it costs to retire comfortably in Panama, and why it has become one of the most popular retirement destinations in the world.
  2. Investing

    Baby Boomer Philanthropy Shifts Wealth Adviser Focus

    Wealth advisers who integrate philanthropy and finance planning can stand out with baby boomer clients.
  3. Retirement

    The 5 Best Retirement Communities in Dallas, Texas

    Discover why the Dallas/Fort Worth area of Texas is a popular retirement destination, and five of the best retirement communities in the area.
  4. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  5. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  6. Insurance

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  7. Mutual Funds & ETFs

    Mutual Funds Millennials Should Avoid

    Find out what kinds of mutual funds are unsuitable for millennial investors, especially when included in millennial retirement accounts.
  8. Insurance

    Using LinkedIn to Find Life Insurance Leads

    Learn how LinkedIn can help you generate leads as a life insurance agent, and understand the steps to turn your profile into a lead-generating machine.
  9. Retirement

    This Is How You Could Live in Costa Rica for $1,000 a Month

    Explore the cost of living in Costa Rica, and learn how you could sustain a nice middle-class lifestyle for yourself on about $1,000 a month.
  10. Retirement

    What Does It Cost to Retire in Costa Rica?

    Tally up the costs associated with taking your retirement in Costa Rica, and determine whether you have what it takes to live in paradise.
  1. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  2. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  3. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  4. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  5. Are Cafeteria plans exempt from Social Security?

    Typically, qualified benefits offered through cafeteria plans are exempt from Social Security taxes. However, certain types ... Read Full Answer >>
  6. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!