Draft: 8/17/09 Revisions to Appendix A in Model 245
The NAIC solicits comments on this draft on or before _____, 2009. Underlining and overstrikes show the changes from the existing
Appendix _ in Model 245. Comments should be sent by email to_______ at firstname.lastname@example.org.
ANNUITY DISCLOSURE MODEL REGULATION Table of
Section 1. Purpose
Section 2. Authority
Section 3. Applicability and Scope Section 4. Definitions
Section 5. Standards for the Disclosure Document and Buyer’s Guide
Section 6. Report to Contract Owners
Section 7. Penalties
Section 8 Separability
Section 9. Effective Date
Appendix __ Buyer’s Guide to Indexed Annuities
Indexed Annuities Moderate Risk
Variable Annuities Most Risk Contents
Appendix __ - BUYER’S GUIDE TO INDEXED ANNUITIES
Drafting Note: The language of the Indexed Annuity Buyer’s Guide is
limited to that contained in the following pages, or to language
approved by the commissioner. Companies may purchase
personalized brochures from the NAIC or may request permission to
reproduce the Buyer’s Guide in their own type style and format.
[The face page of the Indexed Annuity Buyer’s Guide shall
read as follows:] Prepared by the National Association of
The National Association of Insurance Commissioners is
an association of state insurance regulatory officials. This
association helps the various insurance departments to
coordinate insurance laws for the benefit of all
This guide does not endorse any company or policy.
Reprinted by. . . It is important that you understand the differences among
various annuities so you can choose the kind that best fits
your needs. Annuities can be deferred or immediate, but
this Guide will focus on deferred indexed annuity contracts
specifically. There is, however, a brief description of other
types of fixed and variable annuities. This Guide is not
meant to offer legal, financial or tax advice. You may want
to consult independent advisors and/or agents. This Guide
includes questions you should ask yourself, your agent or
the company. Make sure you are satisfied with the answers
before you buy. If you do not understand the answers, ask
again, ask the company or ask your state insurance
We have included a list of common terms used with annuities and
what each means. You may refer to that list as you read this Guide,
the disclosure and your contract.
This Guide refers to the disclosure you are receiving with your
annuity contract. The disclosure summarizes the terms of your
contract and defines some of the words used in the contract. It will
explain how your annuity increases in value and what charges are
taken from your contract. Make sure your agent goes through the
disclosure with you so you understand it.
WHAT IS AN ANNUITY?
An annuity is a contract in which a consumer deposits a sum of money,
and an insurance company makes a series of income payments at
regular intervals in return. Only an annuity can pay an income that
can be guaranteed to last as long as you live. In some annuities, you
can receive income payments right away.
Although you can earn interest on an annuity, it is not a savings
account. If you buy an annuity, it should be to reach long-term
financial goals. All annuities have a surrender charge, which discourages the
consumer from ending the contract before the end of the surrender
charge term. The length of time that you will pay a surrender charge
and amount of each year’s surrender charge varies from one annuity to the next. Every indexed annuity offers you the option to access
some of your money each year without paying a surrender charge.
However, if you withdraw more than the penalty-free amount during
the surrender charge period, you may pay a surrender charge (also
known as a withdrawal charge). The charge is usually a percentage of
the premiums you have paid or of the value of the account when you
make the withdrawal. The charge can be much more than the interest
earned on the annuity in the first
few years, so it is possible to lose not only the interest, but also some of
your principal (the amount of your original premium) if you make a
withdrawal or surrender your annuity. You can find the specific ways
these charges work in the annuity contract and they are summarized
in the disclosure.
WHAT ARE THE DIFFERENT KINDS OF ANNUITIES?
This Guide explains major differences in annuities to help you
understand how each might meet your needs.
This Buyer’s Guide focuses on indexed annuities. If you are
interested in a different type of annuity, ask your agent about that
Annuities differ in several ways: How many premiums you pay. When the company makes income
payments to you. How the money in the annuity earns interest.
1. How Many Premiums You Pay: Single Premium or Flexible
Premium Annuities You pay the insurance company only one
payment for a single premium annuity. You can make a series of
payments for a flexible premium annuity and, within set limits, you
pay whenever you want.
2. When the Company Makes Income Payments to You: Immediate or
In an immediate annuity, income payments start no later than one
year after you pay the premium. You usually pay for an immediate
annuity with one payment. The income payments from a deferred annuity may often start many
years later or not at all. Deferred annuities have an accumulation period and a payout period if you choose to receive income during your lifetime. During the accumulation period, the money you put into
the annuity earns interest. The earnings grow tax-deferred as long as
you leave them in the annuity. After If you chose to receive payouts,
the accumulation period ends and the payout period (or the
annuitization period) begins. During the payout period, the company
pays income to you or to someone you choose.
3. How the Money in an Annuity Earns Interest: Fixed, Variable,
and Indexed Annuities Fixed
During the accumulation period of a fixed annuity, your money earns
interest at declared rates set by the insurance company or in a way spelled out in the annuity contract. The company guarantees the
contract will earn no less than a minimum rate of interest. During the
payout period, the amount of each income payment to you is set once
the payments start and will not change. If you do not want to consider
an indexed annuity, please ask for the fixed annuity guide.
During the accumulation period of a variable annuity, the insurance
company puts your premiums into separate accounts. You decide how
the company will allocate those premiums, depending on how much
risk you want to take. You may put parts of your premium into a
combination of bonds, stocks, or other equity accounts, with no
minimum guaranteed interest. You also may choose a fixed account,
which may have a minimum guaranteed interest rate. During the
payout period of a variable annuity, the amount of each income
payment to you may be fixed (set at the beginning) or variable
(changing with the value of the payments in the separate accounts). If
you want to consider a variable deferred annuity, please ask for that
An indexed annuity is a type of fixed annuity where the return on
interest (return implies a security and that confuses the consumer or
sets false expectations. You use it below and should be here for
consistency) your money depends on how you choose to allocate the
premium payments. Indexed annuity crediting strategies earn
interest based on the performance of an index, such as the Standard 1
. Usually, you can also choose an option and Poor’s 500 (S&P 500)
with a fixed interest rate, similar to a fixed annuity product. This
Guide describes indexed annuities.
HOW DO I DECIDE WHICH ANNUITY IS BEST FOR ME?
Your agent’s recommendation of an annuity should be based on his/her knowledge of your current financial situation, tax status,
objectives and needs. It is important that you discuss with your agent
your total financial and life situation, so you can decide whether an
annuity is a good choice for you. You should ask your agent for a
disclosure that is specific to the product you are considering. If we
require this in the disclosure model why do we need the product
training element in the Suitability Draft? The agent will suggest
annuities that are suitable for your situation. If you feel that you have
a different risk tolerance, and alternative buyer’s guide may be more
suitable for you. An important decision is the amount of risk that you
are comfortable with.
Annuity contracts may be broadly categorized by the amount and
type of risk you are able and willing to assume. The types of annuities
and level of overall risk the different type of risk they involve are
Fixed Annuities Least Risk
Indexed Annuities Moderate Risk
Variable Anniuties Most Risk
? VARIABLE ANNUITIES –Is the potential for higher earnings
that are not guaranteed more important to me and am I willing
to risk losing the premiums I have paid and any interest
? NON-INDEXED FIXED ANNUITIES - Am I interested in a
declared interest rate that is guaranteed for a certain period aas
well as a minimum guaranteed rate, with little or no risk of losing
my premiums, in exchange for less potential to earn higher
? INDEXED ANNUITIES - Am I somewhere between these two
and willing to accept a lower minimum interest guarantee with
little or no risk of losing my premiums in exchange for the
opportunity to earn a higher interest rate? You may choose to add benefits known as riders to your annuity.
Some riders offset some of the risks of owning certain annuities. There
usually is an additional cost for these riders. Some annuities have
built-in features that offset some of the annuity’s risks as well.
HOW CAN I ACCESS MY MONEY?
Each annuity offers more than one way to access your money: 1) as income payments over time, 2) as withdrawals, 3) by surrendering your annuity and 4) as a death benefit to your beneficiaries if you die during the accumulation period. If you take money by making a withdrawal or surrending your annuity, you will likely pay fees and may not get back all of the premiums you have paid. The contract and the disclosure tell you how much you can take out without paying a charge and when the charges no longer apply.
One of the most important benefits of deferred annuities is your ability to use the value built-up during the accumulation period to receive a lump sum payment, or multiple income payments during the payout (or annuitization) period. Income payments are usually made monthly but you may choose to receive them less often. The size of the income payments are based on the accumulated value of your annuity and the benefit rate when income payments begin. The benefit rate usually depends on your age and sex, as well as the annuity payment option you choose. For example, you might choose payments that continue as long as you live, as long as you and your spouse live or for a set number of years. Another important benefit is that you are NOT REQUIRED to choose a payout option, you simply leave the annuity in the accumulation period until you die. NOTE: if you live longer than the MATURITY DATE of the annuity you will either have to request an extension of the date or select a payout option.
There is a table of guaranteed benefit rates in each annuity contract. Some companies have current benefit rate, which exceeds the guaranteed benfit rates. The company can change the current benefit rates at any time, but the current benefit rates can never be less than the guaranteed benefit rates. When income payments start, the insurance company uses the benefit rate in effect at that time to figure the amount of your income payment.
Companies may offer a choice of income payment options; you choose
the option. If a lump sum payment is a choice, ask when it would be
available and how choosing that option affects the payout. If this is an option, think about whether a lump sum payout may be a better
choice than payouts over time.
You can take money out of your annuity before income payments
begin, but you may pay a fee. Most indexed annuities let you
withdraw a percentage of your annuity’s value annually (typically
10%) without paying a surrender charge. If you make a larger
withdrawal or take out all of your money, you pay a surrender
charge. You may lose any interest on the amount withdrawn, and you
may lose part of your principal. After you have owned an indexed
annuity for a certain length of time (typically 7 – 14 years), the
surrender charge period may end and you will be able to take money
out without paying a surrender charge. Many annuities let you
withdraw part of the accumulation value without paying a surrender
charge if certain events such as nursing home confinement or
terminal illness occur.
Annuities have stated maturity dates. When the maturity date is
reached, the contract may automatically expire and you must take a
payout of the annuity or renew. You are usually given a short period of time, called a window, to decide if you want to renew or take the payout from the annuity. If you take the payout surrender during the window, you will not have to pay surrender charges. If you renew, the (sometimes but not in most?) surrender or withdrawal charges may
start over. In some annuities, there is no charge if you surrender your contract when the company’s current interest rate falls below a certain level. This may be called a bail-out option.
In some flexible premium annuities, a new surrender charge may apply to each premium paid. This may be called a rolling surrender charge. Lastly, an annuity will pay a death benefit to your designated beneficiary, if you die during the accumulation period. In some annuities, there is a charge that will reduce what your beneficiaries receive if you die. Check your contract or disclosure. Some annuity contracts have a market value adjustment (MVA) feature. A market value adjustment could increase or reduce your annuity’s value if you withdraw more than the penalty-free amount. In general, if interest rates are lower at the time of withdrawal than at the time the contract was issued, your annuity’s value will be increased. If interest rates are higher at the time of withdrawal than at the time of issue, your annuity’s value will be reduced. Every MVA calculation is different, however; check your contract or disclosure for details.
Some annuities offer a benefit called a Guaranteed Lifetime Withdrawal Benefit (GLWB). This feature guarantees an annuity owner the option to take annual withdrawals for his/her lifetime at a stated percentage, based on his/her age. These withdrawals can provide guaranteed income you cannot outlive, similar to
annuitization. However, this benefit is an alternative to annuitization on fixed annuity contracts. A GLWB is similar to annuitization, but provides more flexibility for income options. However, while you can annuitize your annuity at no cost to you, most annuity contracts charge a percentage of your annuity’s value annually for a GLWB benefit. Carefully consider how long you think you will live, as well as the costs of benefits when considering a GLWB.