How Are Annuities Regulated? Federal And State Laws Explained

Not all financial products are created — or regulated — equally. Stocks and mutual funds fall under federal securities laws, while savings accounts benefit from FDIC protection. 

But annuities? They’re a bit of a hybrid, with most regulation taking place at the state level, complemented by federal oversight for certain types. 

Unlike more familiar financial products, annuities come with their own rules, risks and safety nets — all of which vary depending on where you live and the type of annuity you buy. 

If something goes wrong — whether from unclear disclosures, unsuitable products or outright fraud — it’s important to understand the regulatory protections (and limitations) in place. Otherwise, you might not know where to turn for help.

In this article, we’ll dive into how annuities are regulated, who’s keeping an eye on bad actors and what safeguards are in place to protect your money — even in worst-case scenarios. 

How are annuities regulated?

Annuities are financial products sold by insurance companies. They’re regulated through a combination of state and federal oversight, with most of the responsibility falling to state insurance departments.

Mostly at the state level

State governments are the primary regulators of annuities. Insurance departments in each state oversee the licensing of agents, the setting of policy and the financial stability of insurance companies. 

State insurance departments are the front-line defense against unethical behavior from insurance companies and agents selling annuity products. These agencies investigate insurers and conduct audits to help identify suspicious activity. They also oversee penalties for violations, ranging from fines to revoking licenses.

State laws, too, often require insurance agents to provide clear and comprehensive disclosures about annuity terms. 

Nearly all states also provide for a “free look period.” During this period, you can cancel your annuity contract for any reason without penalty and get your money back. However, free look periods are short, usually lasting only 10 days after receiving your contract in most states. 

Variable annuities are regulated at the federal level 

While states dominate most annuity regulation, variable annuities are different. Because they include subaccounts of securities — usually mutual funds — they’re regulated at the federal level too. 

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) regulate the securities aspect of variable annuities. They oversee  disclosures, such as fees, investment risks and potential returns. Agents selling variable annuities must hold securities licenses and adhere to federal securities laws.

Who regulates bad actors?

If you suspect fraud or unethical practices from your annuity company, you can file a complaint with your state’s insurance department. Many departments offer online complaint portals to streamline the process.

For issues involving variable annuities, you can also report concerns to FINRA or the SEC. These agencies have the ability to levy fines and bar individuals from the securities industry.

Annuity suitability and best practices standard

When selling annuities, agents must adhere to a “best interest” standard, which is less stringent than a fiduciary standard. A fiduciary must act solely in the client’s best interest, often requiring them to avoid conflicts of interest entirely. In contrast, the best interest standard allows for conflicts so long as they’re disclosed and the product aligns with the consumer’s financial needs.

In 2020, the National Association of Insurance Commissioners (NAIC) updated its Suitability in Annuity Transactions Model Regulation to include a “best interest” standard. This change requires agents to:

• Act with diligence and care when recommending an annuity.
• Disclose material conflicts of interest.
• Document the basis for their recommendations.

Most states have adopted this model regulation, creating a more uniform standard across the country. In New York, however, agents and brokers selling annuities must follow the stricter fiduciary rule that prioritizes customer’s interest over sales commissions. 

Am I protected if my annuity company fails?

If the insurance company issuing your annuity becomes insolvent, or fails, your money isn’t insured by the federal government. However, state insurance guaranty associations offer some protection to policyholders. 

Because insurance is regulated at the state level, federal laws like bankruptcy statutes typically don’t apply to insurance companies. So when an insurer goes broke, the state insurance department intervenes and assumes control of the company.

State guaranty associations also step in and attempt to make annuity owners “whole” by covering eligible claims that the insurer would have otherwise paid.

Not all claims are covered though, and there are limits on how much an association will pay per claim. In most states, the maximum coverage limit is $250,000. 

It’s rare for insurance companies to go bust. But if you receive a notice of receivership or liquidation from your annuity provider, here’s what you should do next.

Bottom line

Annuity regulation is a patchwork of state and federal oversight, from state insurance departments monitoring agents and brokers to federal agencies regulating variable annuities. Despite these protections, it’s important to understand your rights as an annuity owner, and know where to turn if something goes wrong.