Insurance Law

Variable Annuities

There are three types of annuities, which are contracts between investors and insurance companies. Fixed annuities provide a guaranteed rate of return for the investor and are considered insurance products. Variable annuities provide a variable rate of return for the investor depending on the results of investment of annuity funds in stocks, bonds, and other investment vehicles.

Variable annuity contracts are viewed as both insurance products and investment products, and variable annuities are regulated by the Securities and Exchange Commission. The third type of annuity — the combination annuity — also is regulated to the extent that it combines investment features of the variable annuity with the fixed return of fixed annuities. While representatives who sell fixed annuities must have an insurance license, representatives who sell variable or combination annuities must have insurance and securities licenses.

An investor in a variable annuity is given a choice among various investment options such as different types of mutual funds. The rate of return on the payments made to purchase the annuity will vary with the rate of return achieved on the chosen investments. The periodic payments that the annuitant eventually will receive also will vary according to the return on the chosen investments.

Cash and investments held by an insurance company for variable annuities must be held in an account separate from the insurer’s general funds. Either the insurer or the separate account must have a net worth of $1 million in order to open and operate the separate account. The separate account may be used to make direct or indirect investments. If the account makes direct investments in particular stocks and bonds, the account must have an independent advisor to manage the account. Also, an account with direct investments is considered an open-end investment company that must register with the Securities and Exchange Commission under the Investment Company Act of 1940. On the other hand, if an account invests only in mutual funds and thus only indirectly in underlying stocks and bonds, an investment advisor for the account is not required to manage the account. However, accounts that make indirect investments only are considered unit investment trusts that also must register under the Investment Company Act of 1940.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.