Introduction to Annuities: Marketing and Regulation

Although only life insurance companies can issue annuities in the United States, these investment vehicles are marketed by many different types of organizations and individuals. Some of the key entities that offer these products include:

• banks
• life insurance agents and brokers
• stockbrokers and Registered Investment Advisers 
• financial planners
• estate and trust officers
• mutual fund companies

Licensing Requirements

Any person directly involved in the selling and marketing of annuities must carry an active life insurance license, regardless of which of the above categories they are in, plus a securities license if dealing with variable contracts. Many personal bankers are licensed to sell fixed annuities to bank customers, although banks can no longer directly issue annuities themselves.

Controversial Marketing Practices

Despite their advantages, annuities are among the most misunderstood and mis-marketed financial products in existence. Although they are designed as retirement vehicles, they are sometimes used as one-size-fits-all investments. Clients and prospects should be aware that most brokers and planners are paid a much larger commission on annuity sales than just about any other type of product that they can sell. Although the standard range of payout is usually about 4% to 6% for fixed and variable contracts, some indexed annuities pay commissions of up to 12% to 15%. For this reason, many financial professionals are biased toward selling these products to clients, regardless of suitability or other factors. Being worth such a large commission also means these vehicles are very profitable to issuers. 

One marketing practice that has received a fair amount of negative publicity in both the financial and mainstream media pertains to indexed annuities. Some agents have aggressively pursued the senior market with long-term, high-surrender–charge indexed annuity products, into which they attempt to put virtually all of their clients' liquid assets. This practice has been – and is being – closely scrutinized by state regulators nationwide. Another debate rages over the practice of funding IRAs and qualified plans with fixed and variable annuity contracts. This strategy is controversial because the tax-deferred feature of annuities is irrelevant inside a plan or account that is already tax-deferred. This issue will be covered in greater detail in a later section.

Because of these questions, be very wary when a salesperson offers to switch the annuity you have for one with supposedly better benefits. For one thing, if your annuity is several decades old, you could have bought it when interest rates were much higher than they are now. Should You Replace Your Annuity – or Not? has the details. In 2016, FINRA (the Financial Industry Regulatory Authority) levied a $25 million fine against MetLife for excessive replacement of variable annuity contracts for the sole purpose of generating commissions.

State Regulation

The annuity marketplace is primarily regulated at the state level because all life insurance companies – and all agents and brokers who sell annuities – must have a life insurance license issued by their state of residence. Fixed and indexed offerings are regulated almost solely at this level because they are not considered securities and therefore fall outside the jurisdiction of the Securities and Exchange Commission (SEC).

Every state has an insurance commissioner who oversees all of the life insurance and annuity business done within the state. The insurance commissioner's office also has a disciplinary record of every registered life insurance agent and broker in the state, and investors can call the commissioner's office to get the background on any person who sells them annuities. They can also call here to register a complaint about their agent or contract.

Federal Regulation

In addition to state regulation, annuities are ultimately defined and governed by the Internal Revenue Code (IRC). The SEC and FINRA oversee the variable annuity market as well, since selling them requires a securities license. Indexed annuities are presently still considered a type of fixed annuity, but there is a definite possibility that these vehicles will eventually be classified as securities due to their market participation.

In the remaining sections of this tutorial, we will examine the three major categories of annuities:

1. Fixed Annuities – appropriate for conservative investors who want or need a guarantee of principal and interest

2. Indexed Annuities – appropriate for moderate investors who want to participate in the markets without risking their principal

3. Variable Annuities – appropriate for moderate to aggressive investors who are willing to risk their principal while saving for retirement (these contracts can also be used by conservative investors with the purchase of guaranteed income riders)

We will examine fixed annuities in Section 5.