Variable annuities with guaranteed lifetime withdrawal benefits (VA/GLWB) and contingent deferred annuities (CDA) can help ensure people don’t outlive their assets, but do present some risks to consumers, according to “Retirement Security: Annuities with Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, but Regulation Varies across States,” a report from the U.S. Government Accountability Office (GAO).
Annuities with GLWBs have been sold for years, but CDAs are relatively new; GAO compared the features of VA/GLWBs and CDAs, examined potential benefits and risks to consumers and potential risks to insurers, and considered their regulation and the extent to which regulations address risks to consumers and insurers.
“We agree with the report’s conclusion that variable annuities with guaranteed lifetime withdrawal benefits as well as contingent deferred annuities can help older Americans ensure they do not outlive their assets,” said Cathy Weatherford, President and CEO of The Insured Retirement Institute. “In an era when consumers will responsible for securing their own financial futures, it is vitally important that consumers have access to a wide array of sound retirement income solutions.” IRI is a not-for-profit organization serving the insured retirement industry and the authoritative source of all things pertaining to annuities, insured retirement strategies and retirement planning.
The GAO report found that consumers might purchase unsuitable products or make withdrawal decisions that negatively affect their potential benefits, and consumers should obtain professional financial advice before purchasing these products, the report said. The products also can create risks for insurers that could affect insurers' ability to provide promised benefits to consumers, if not addressed.
“As American’s struggle to manage the risks associated with retirement planning and uncertainty stemming from volatile markets and a sluggish economy, these lifetime income products offer consumers the certainty they seek during unsettling times,” Weatherford said. “Regarding the regulatory environment, we believe that current regulatory oversight at both the federal and state levels—including the existing solvency and consumer protection rules governing the annuity industry—has proven to be robust and effective. These safeguards protect both the industry and the consumers it serves. It is through this current framework that not a single annuity owner ever missed a payment during the financial crisis.”
VA/GLWBs are considered both securities and insurance products and are subject to federal securities regulations and state insurance regulations, and the National Association of Insurance Commissioners (NAIC) has determined CDAs to be life insurance products subject to state law and regulation for annuities. NAIC began reviewing annuity regulations in March 2012 to determine whether changes were needed to address the product-design features of CDAs, including potential modifications to annuity disclosure and suitability standards.
NAIC also is reviewing capital and reserving requirements to help insurers manage product risk. NAIC and the National Organization of Life and Health Guaranty Associations also are working to determine whether state insurance guaranty funds, which protect consumers in the event insurers become insolvent, cover CDA products. They agree individual states need to reach their own conclusions whether state guaranty fund laws allows for CDA coverage; until these regulatory issues are resolved, consumers may not be fully protected.
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