Regulatory Concerns Pose Risk for Americans with Annuities

Statewide regulatory concerns could threaten the retirement security of older Americans depending on lifetime annuities. 

As rising health care costs and inflation will cause many older Americans to rely on annuities for a stable retirement, differing state regulations threaten to limit the security provided by these assets.

Such discrepancy among states has prompted an examination by the U.S. Government Accountability Office (GAO), stressing the need for regulatory agreement on a statewide level so consumers will not be at risk of outliving their investments.

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While variable annuities with guaranteed lifetime withdrawal benefits (VA/GLWB) and contingent deferred annuities (CDA) share a number of product features, they both have structural differences. 

Both provide consumers with access to investment assets and the guarantee of lifetime income, but while VA/GLWBs are held in a separate account of the insurer, CDA assets are held in an investment account owned by the purchaser of the annuity, writes GAO. 

Because VA/GLWBs are considered to be both securities and insurance products, they are covered by federal securities regulations and state insurance regulations. 

For CDAs, the National Association of Insurance Commissioners (NAIC) committee—which GAO notes is responsible for life insurance and annuities products—determines them to be life insurance products subject to state law and regulation. 

Although NAIC has already developed regulations at the state level for annuity products, states differ on the extent to which they have adopted such regulations, hence GAO’s concern. 

CDAs may pose solvency risks for both consumers and insurers, writes GAO, as insurers offer consumers an income guarantee but do not maintain the assets on which the guarantees are made. 

Selling CDA products before regulatory issues are finalized may even expose consumers to greater insolvency risks, believes a consumer advocate mentioned in the report.

“Longevity risk, or the potential for outliving one’s financial resources in retirement, is a critical issue for today’s older Americans,” writes GAO. 

A decrease in defined benefit retirement plans that guarantee lifetime income has led many workers to take on increased responsibility for managing their retirement savings, more so than past retirees, according to GAO.

Written by Jason Oliva

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  • The National Association of Insurance Commissioners (“NAIC”) is not a governmental body. It cannot write regulations or laws. Like the Mortgage Bankers’ Association (“MBA”) it can write model acts, regulations, etc. Unlike the MBA, the NAIC is composed of state commissioners, not members in private industry.

    Let us hope the members of the NAIC are able to work out their differences so that seniors can enjoy a safer and less worrisome retirement.

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