Annuities are issued by insurance companies as contracts made by people or companies that have life insurance licenses. Most of the time, annuities are contracts issued with banks, stockbrokers, registered investment advisors, brokers, or life insurance agents.
If you want to purchase annuities or are interested in the best fixed-rate annuities, you first need to know all the regulations. Annuities are regulated by the state in which you are buying them. There is no federal regulation for annuities. Variable annuities also have an extra level of regulation as they are overseen by the US Securities and Exchange Commission (SEC) as well as the Financial Industry Regulatory Authority (FINRA).
There have been some changes to the regulations of annuities in the last few months and years, so this guide will discuss the newest regulations and what they mean for those purchasing and holding them.
Regulations From the State
Each state has its own regulations when it comes to annuities, so make sure you check with your state’s rules. Through the state’s insurance commissioner, you can find all the regulations. You can also log complaints about businesses and people in case you have had a bad experience while buying an annuity.
You might find that some of the state laws are very similar from one state to the next because there are model laws created by the National Association of Insurance Commissioners. These laws are created to ensure that the states can have consistency in their rules even though the states are free not to use these laws if they find they do not like or agree with some of them.
Many states also adopt the laws drawn out by the NAIC, but they modify them to make them for their own needs.
Changes to the Suitability Standard
The NAIC also has a governance called Suitability in Annuity Transactions Model Regulation. This has laws drawn out stating the rules on when a sales representative is allowed to recommend someone to purchase a specific annuity.
In the last year, the NAIC has made a lot of changes to this rule because federal laws were taken away that were meant to make stricter rules for people that are recommending and selling annuities.
This rule that was taken away by the US Labor Department was meant to ensure that sales representatives put the needs and interests of their customers before their own. Since the law was taken away, the Securities and Exchange Commission was quick to make its own standards that were stricter on the sales representatives. These new rules oversee all annuity transactions.
This new law is called the Annuity Suitability Working Group, and it makes sure that all recommendations are in the best interest of the customer, not of the sales representatives or the company that they work for. Sales representatives are also not allowed to use their own financial interests to make recommendations.
As of 2022, there have been 27 states that adopted this new rule. Other states either rejected it or modified the law and made their own version of it.
New Model Laws for Disclosure
There are also newer rules regarding disclosure laws. They are model laws, but many states have chosen to adopt them while other states have rejected them or modified them. It’s called the NAIC Annuity Disclosure Model Regulation. It requires that sales representatives protect their consumers by ensuring that all parts of the contract are enclosed and easily understood.
All states require some sort of disclosure when it comes to what you’re selling, so you will need to check in and see if the state you live in uses the model laws laid out by the NAIC or if they have created their own for you to follow.
All states require that annuity contracts and forms be approved by the insurance commissioner. They can also be approved by the Interstate Insurance Product Regulation Commission. There are more than 40 states that belong to this board, so most people can get their forms approved by them.
Secure Act 2.0
Another important thing to note about changing annuity contracts is the Secure Act 2.0 or the Enhancing American Retirement Now (EARN) Act. One of the sections has removed the barrier for life annuities. This is for all annuities with increasing payments of less than 5%.
Starting in 2023, there is also the option to have more lifetime income through qualifying longevity annuity contracts. The 25% limit that used to be in place has now been eliminated.
There is a new maximum limit, but it’s $200,000 and has been adjusted for inflation. This is known as improved QLACs, and many clients should think about adding this to their income plan if they are going to be making more money soon or in the future.
These changes also were included in NASAA exam updates made in June 2023.
Variable annuities have also had some changes in the year 2023. This is known as the new FINRA Rule 2330. It has made new sales practices that write about recommended purchases and also discuss exchanges of deferred variable annuity.
These rules are important because they discuss when a person should purchase, exchange, or surrender a deferred variable annuity to one of their customers. All these rules also establish that there need to be clear supervisory procedures so that customers and sales representatives can be compliant with this rule.
With these changes in the variable annuities, employees and companies need to make sure there is enough training on all the new rules and that consultants are able to discuss with clients the rules and their changes.
Understanding annuities is often complex, even when there are no changes to consider. However, the changes to the rules are important to note because you want to make sure you know all the regulations of the annuities you are selling or buying.
Each state has the option to adopt or reject new regulations, but most states adopt a version that is outlined in the NAIC or the rules by the insurance commissioners.