Guaranteed Lifetime Withdrawal Has Benefits, Risks

While annuities with guaranteed lifetime withdrawals can help older Americans ensure they do not outlive their assets, they do present some risk to consumers, the Government Accountability Office (GAO) said in a report.

Two such products—variable annuities with guaranteed lifetime withdrawal benefits (VA/GLWB) and contingent deferred annuities (CDAs)—share a number of features but have some key structural differences. Both annuities provide access to investment assets and the guarantee of lifetime income, but while VA/GLWB assets are held in a separate account of the insurer for the benefit of the annuity purchaser, the assets covered by a CDA are generally held in an investment account owned by the CDA purchaser, the GAO said.

According to industry participants, while annuities with GLWBs have been sold for a number of years, CDAs are relatively new and are not widely available. The GAO was asked to review issues relating to these financial products.

One benefit of these products is a steady stream of income regardless of how the investment assets perform or how long the consumer lives. At the same time, the consumer maintains access to their assets for unexpected or other expenses. VA/GLWBs and CDAs are complex products that present some risks to consumers and require them to make multiple important decisions.

For example, consumers might purchase an unsuitable product or make withdrawal decisions that could negatively affect their potential benefits. The GAO spoke to several insurers and regulators that said it was important for consumers to obtain professional financial advice before purchasing these products. These products can also create risks for insurers that, if not addressed, could ultimately affect insurers’ ability to provide promised benefits to consumers.

VA/GLWBs are considered to be both securities and insurance products, and are therefore covered by both federal securities regulations and state insurance regulations.

The National Association of Insurance Commissioners (NAIC) committee responsible for life insurance and annuities products has determined that CDAs are life insurance products subject to state law and regulation for annuities. According to officials at the Securities and Exchange Commission (SEC), existing CDAs have been registered as securities with SEC, and therefore are covered by both federal securities laws and regulations, and state insurance regulations.

At the state level, NAIC has developed state disclosure and suitability regulations for annuity products. However, states differ on the extent to which they have adopted these annuity regulations, and some have no protections at all.

As a result, consumers in states that have adopted different regulations may have different levels of protection. NAIC and state regulators told the GAO that they are currently reviewing the regulations of CDAs.

In March 2012, NAIC began reviewing existing annuity regulations to determine whether changes are needed to address CDAs’ unique product design features, including potential modifications to annuity disclosure and suitability standards. NAIC is also reviewing what kinds of capital and reserve requirements may be needed to help insurers manage product risk.

NAIC and the National Organization of Life and Health Guaranty Associations are each working to determine whether state insurance guaranty funds, which protect consumers in the event insurers become insolvent, cover CDA products. Both agree that each state will have to reach its own conclusion about whether their particular state guaranty fund laws allow for CDA coverage. Until these regulatory issues are resolved, consumers may not be fully protected.

The GAO’s report compares the features of the two types of annuities, and examines potential benefits and risks to consumers as well as potential risks to insurers. The GAO examines the regulation of these products and the extent to which regulations address consumer risk. The GAO analyzed insurance company product information, proposed and final rules and regulations, and studies and data related to retirement and product sales. The GAO also interviewed federal and state regulators, as well as insurers, consumer advocates and industry organizations.

“Annuities with Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, But Regulation Varies Across States,” the GAO’s report on one aspect of retirement security, can be viewed here.