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Last Updated: 5/9/2023

Issue: An annuity is an insurance contract sold by insurance companies. The insurer provides for either a single income payment or a series of income payments at regular intervals in exchange for a single premium (contribution) or multiple premiums (contributions) paid by the annuitant. Annuity contributions earn interest that can grow tax-deferred in the accumulation phase and can provide income for life in the income payment phase. These characteristics make annuities a popular choice among retirement income vehicles.

A variable annuity is an annuity contract that allows the policy owner to allocate contributions into various subaccounts of a separate account based upon the risk appetite of the annuitant. In contrast to fixed annuities, policyholders assume all of the investment risk with variable annuities because they are separate account products that are valued at market every day. Additionally, variable annuities are registered as securities with the Securities and Exchange Commission (SEC).

Overview: Insurers sell a variety of annuity products that differ in how they accumulate funds, get annuitized, and provide guarantees. Annuity contributions can be made as a one-time large lump sum payment or through a series of flexible contributions that can differ by amount and timing, depending on the insurance contract. Single contribution policies are useful when the annuitant has a large lump sum of money, such as with an inheritance or lump sum retirement plan payout. Alternatively, flexible contribution policies are most suitable to consumers who need to accumulate retirement funds over time.

Annuities can be classified as either immediate or deferred.

  • Immediate annuities are purchased with a one-time contribution and provide income payments to the annuitant within one year of purchasing the contract.
  • Deferred annuities are purchased with either a single contribution or flexible contributions over time and provide income payments to the annuitant that begins at some future date.

Annuities can also be classified as fixed, variable, or indexed.

  • Fixed annuity contracts guarantee a minimum credited interest. For immediate fixed annuity contracts, annuitants receive a fixed income stream based, in part, on the interest rate guarantee at the time of purchase. For fixed deferred annuity contracts, the insurer credits a fixed interest rate to contributions in the accumulation phase and pays a fixed income payment in the annuitization phase.
  • Variable annuity contracts allow the policy owner to allocate contributions into various subaccounts of a separate account based upon the risk appetite of the annuitant. The contributions can be invested in stocks, bonds or other investments. Income payments in the annuitization phase can be fixed or fluctuate with the investment performance of the underlying subaccounts of the separate account. In contrast to fixed annuities’ guaranteed interest provision, policyholders assume the investment risk with variable annuities because they are separate account products that are valued at market every day.
  • Indexed annuity contracts have both fixed and variable features. Under these policies, interest credits are linked to an external index of investments, such as bonds or the S&P 500, but contain a minimum guaranteed interest rate. Other recent market additions include the expansion of various product guarantees. These guarantees can ensure the policyholder receives minimum death benefits, guaranteed living benefits, accumulation benefits, minimum credited interest rates, and income benefit or withdrawal benefit amounts.

CIPR Study on the State of the Life Insurance Industry notes that by the mid-1980s, growth in individual annuities had resulted in insurers' overall product mix becoming almost evenly distributed between annuity considerations and traditional insurance products. By the end of the century, annuity products had become so popular their sales volumes outpaced those of traditional life insurance. Low interest rates and equity market volatility of the past decade have placed pressure on the returns for variable annuity products and has hurt insurers' ability to support variable annuities, many of which were issued with minimum guarantees. Insurers have responded by reducing their guarantees and crediting rates to accommodate the new environment. Despite these economic pressures, variable annuities continue to be in demand, particularly as aging consumers seek savings vehicles designed to help them manage their long-term needs.


Status: Life insurance and annuities are regulated by state insurance commissioners. The NAIC encourages states to adopt model laws and regulations designed to inform and protect insurance consumers. The NAIC Suitability in Annuity Transactions Model Regulation (#275) sets forth standards and procedures for recommendations to consumers that result in a transaction involving annuity products to ensure the insurance needs and financial objectives of consumers are appropriately met at the time of the transaction. The NAIC Annuity Disclosure Model Regulation (#245) establishes standards for the disclosure of certain information about annuity contracts to protect consumers and foster consumer education.

In 2021, the NAIC Annuity Disclosure (A) Working Group finalized revisions to Model #245 to allow for the illustration, under certain circumstances, of indices that have been in existence for fewer than 10 years. The revisions were adopted by the full NAIC membership at the Summer 2021 National Meeting.

The NAIC's Life Actuarial (A) Task Force was formed to identify, investigate, and develop solutions to actuarial problems in the life insurance industry. The Task Force adopted changes to Actuarial Guideline XLIII (AG43) and VM-21, Requirements for Principle-based Reserves for Variable Annuities to implement the Variable Annuity Framework adopted by the Variable Annuity Issues (E) Working Group in 2018. The implementation included development of additional variable annuity reporting requirements in VM-31, PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation. The Task Force is charged with keeping reserve, reporting, and other actuarial-related requirements current including the Valuation Manual and actuarial guidelines.

The VM-22 (A) Subgroup has exposed an American Academy of Actuaries proposal for modernizing the valuation process for all non-variable annuities. Among the considerations for that valuation process are the determination of a standard projection amount and review of the mortality assumption for pension risk transfer business.


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