Microsoft Word - 8-17-09 NAIC Buyers Guide to Indexed Annuities

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Microsoft Word - 8-17-09 NAIC Buyers Guide to Indexed Annuities

     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


    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


     Least Risk

    Fixed Annuities

    Indexed Annuities Moderate Risk

    Variable Annuities Most Risk Contents


    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

    Insurance Commissioners

    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.


    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.


    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

    buyer’s guide.

    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

    Deferred Annuities

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.


    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

     listed below.

    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.


    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.

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