Fixed annuities are annuity contracts issued by a life insurance company. The life insurance companies that issue annuity contracts generally issue other types of insurance contracts for individuals facing mortality and morbidity risks such as life insurance, disability insurance and long term care insurance. A life insurance company’s ratings for financial strength are important for fixed annuities because funds invested in fixed annuity contracts are invested in the general account which is subject to the claims of policyholders. Life insurance companies must manage the risks of general account investments and underwrite the claims of all policyholders. The different types of fixed annuity contracts can be purchased by insurance licensed agents or through internet-based insurance brokers. Each type of annuity is designed to meet a specific need for retirement income and/or tax deferred accumulations. The different types of fixed annuities that are available include:
- Immediate Annuities;
- Fixed Annuities; and
- Market Value Adjusted (MVA) Annuities
Immediate annuities provide a guaranteed immediate income to annuitants for life with various payment options for joint annuitants and beneficiaries. The payments from the immediate annuity can be monthly or annual with 3% annual cost of living adjustments.
Fixed annuities declare a guaranteed fixed interest rate on contract balances for a rate guarantee period with a minimum annual interest rate over the life of the contract, usually 3%. The guaranteed rate periods can be 1, 3, 5, 7 and 10 years in duration. Funds invested in insurance company general accounts are invested primarily in a portfolio of income-producing assets such as real estate, mortgages and bonds. Based on the portfolio performance and underwriting gains or losses, an interest rate guarantee is declared for the various interest rate guarantee periods which are credited to a contract holder’s annuity account.
Market value adjusted (MVA) annuities are similar to fixed annuities except the declared interest rates are greater for the same interest rate guarantee period. The annuities differ because the account value for the MVA annuity is adjusted up or down, inversely to changes in the level of market interest rates, similar to bond valuations. It is important that financial advisors explain the differences in declared interest rates and the potential risks associated with market value adjusted annuities. Investors can be surprised by losses in their MVA annuities during periods of rising market interest rates.
Recent developments in the competition amongst insurance companies for fixed annuity business has led to the innovative use of interest rate bonuses credited to fixed annuity products which can result in significant abuses. The annuity bonus interest rate is designed to replace the annuity contract with a “higher” interest rate credited on the new annuity contract during an initial period with the intention to provide an offset against any surrender charges incurred from the surrender of an annuity contract. The recommendation to sell an annuity and to replace it with another one may be made only after fully assessing the suitability of the transaction for the customer. There are important factors to consider which require the disclosure all relevant facts related to the replacement transaction. For instance, the bonus interest rate annuity might have a lower minimum guaranteed rate or an extended surrender charge period, or the loss of contractual living and death benefits. These costs are often minimized or not disclosed which result in a fraudulent misrepresentation or omission of material facts when the motive may be due to conflicts of interest when the financial advisor’s compensation is taken into consideration. An investment in a replacement annuity through sales proceeds from another annuity issued by another insurance company with similar features is prohibited by securities and insurance regulators, unless there is an economic benefit to the investor. If there is no economic benefit to the investor, it is assumed the reason for the recommendation was solely for the generation of commissions. These types of transactions are considered “annuity switch” transactions and violations of securities and insurance industry conduct rules.
Our team of lawyers can help you determine whether you suffered economic losses from investments in fixed annuities that are the result of violations of state insurance or securities industry rules and regulations. If an investor suffers losses in fixed annuities as a result of violations of state insurance or securities industry rules and regulations they may be able recover their losses through a civil court or FINRA arbitration claim.