How Are Annuities Regulated

There are several types of annuities that an investor will be able to purchase. Each annuity may be regulated differently depending on its characteristics. To begin with, an annuity is a contract between an investor and an insurance company, therefore an annuity is regulated as insurance instruments, though others are viewed and regulated as investment securities.

Generally, annuities provide two distinct benefits: they offer predictable investment growth and they also put off any taxes on that growth until the first withdrawal is made at a later date, at which point the investor would pay taxes only on that growth and not the principal, if the purchases were made with after tax dollars. Despite their complexity of regulations, they remain a favorite among seasoned investors.

As a whole, annuities are regulated by state governments. Since various annuities might have similar characteristics as investments vehicles and life insurance some of them fall under SEC rules. When purchasing an annuity, it is prudent to ask how you are specific annuity if regulated and protected. Nevertheless, there are still some general rules to the regulation, depending on which type of investment vehicle you have.

As a whole, fixed annuities are not subjected to the SEC rules. One the other hand variable annuities, which are able to invest in several mutual funds at once, are subject to SEC regulations. Another popular annuity is the index annuity, which may or may not be regulated by federal regulators. The reason is that index annuities offer some characteristics of insurance items, such as a guaranteed return – of which is spelled out in the contract. However, indexed annuities also provide a return that is pegged to the overall market which is a characteristic of a SEC regulated security.

Though a bit more complicated, an indexed annuity can be regulated by the SEC, but not necessarily so. If the index annuity is not regulated by the feds, then it may fall under jurisdiction of the individual state regulators. Likewise, depending on what is being sold, the annuity agent may need to hold a specific license to actually sell the product. An investor should always check on the annuity agents license and his ability to sell in your state.

The investor may know that there are three kinds of annuities as stated above, however, not all annuities may be regulated in a similar manner. Earning a fixed rate of interest, fixed annuities can generate a predictable level of income for the investor while growing in a tax deferred account. A variable income can provides the investor a variety of investment options including the ability to place funds via a percentage into various funds that could differ in risk. Index annuities are often linked to the overall market growth or contraction.

While investments like annuities that fall under the “securities” umbrella are not guaranteed because they their value may fluctuate, one of the important things the SEC ensures is transparency. Therefore, what the SEC requires is that all investors have the ability to gain access to the health and data of its activities. So, for example, having a prospectus and regular reports would be necessary. Many insurance companies, who are not regulated or mandated to publish a prospectus anyway, to allow for increased confidence in the company from the investor.