Single premium fixed annuities are contracts issued by insurance companies that provide purchasers with tax-deferred growth. The contracts are often sold through banks and financial institutions but are not insured by the Federal Deposit Insurance Corporation, as they are not standard bank products. Annuities, like other insurance products, are protected by the financial strength of the issuing companies.
History of Insurance Regulation
In 1851, New Hampshire became the first U.S. state to introduce an insurance commissioner. In 1871, the National Association of Insurance Commissioners was founded to create inter-state cooperation. In 1945, the McCarran-Ferguson Act officially gave states jurisdiction over the insurance industry, whereas banking and the New York Stock Exchange are regulated at the federal level. In 1999, The Financial Modernization Act allowed closer ties between insurance companies and financial institutions and led to an increase in annuity sales through banks.
Function of Insurance Regulators
The National Association of Insurance Commissioners requires insurance companies to make financial filings on a quarterly basis and the records remain in a shared database for 15 years. Individual states require people who sell annuities and other insurance products to undergo training and pass a licensing exam. Many states allow annuity purchasers a free-look provision of at least 30 days, during which they can cancel a contract for a full return of premium. Provisions like these help ensure that sales persons make suitable product recommendations.
Benefits of Single Premium Fixed Annuities
The Internal Revenue Service allows funds in annuities to grow tax-deferred. People who invest nonqualified funds into a single premium annuity shelter the funds from taxation and people who invest nonqualified funds enjoy tax-deferred growth. Single premium fixed annuities normally offer a specific rate of interest for at least four years. Interest rates on fixed annuities are normally higher than on FDIC-insured products like certificates of deposit, although both fixed annuities and FDIC-insured products offer principal protection.
Features
Some fixed annuities pay a high rate of interest for the first year and varying rates thereafter, but have bail-out provisions that allow contract surrenders if rates fall below a specified minimum. Annuities often have penalty-free withdrawal provisions for certain medical expenses and nursing home fees. Fixed annuities can be held jointly as well as under single ownership. After the accumulation phase, contract owners can annuitize funds to create an income stream or take a lump-sum payment.
Considerations
Single premium fixed annuities are illiquid and although provisions for withdrawals exist, full withdrawals usually cause the owner to forfeit the accrued interest. Long-term fixed products expose clients to inflation risk if the rates do not keep pace with the consumer price index. Many state insurers have guarantee plans in place to protect against insurance companies failing, but there are no federal provisions to protect annuities holders in the event that a life insurance company fails.
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