The U.S. Government Accountability Office has been researching annuities for a few years to see if they want to recommend them to Americans as the future of retirement income streams. The GAO’s latest report, “Retirement Security: Annuities with Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, But Regulation Varies across States,” is summarized by Chris McMahon of Insurance Networking News. McMahon’s article “CDAs and GLWBs Help Retirees Avoid Outliving Assets,” says that there are two sides to the story. Variable annuities with guaranteed living withdrawal benefits and contingent deferred annuities are a great way to guarantee that one will not outlive their retirement savings. But both products come with some risk to the consumer and to the issuing insurance company, so we need to make sure that we are all informed.
By comparing the benefits and risks of both types of annuities, the GAO was able to determine where regulations might need some tweaking and where they are just right. They also looked at the risks to insurance companies because regulations affect those as well. The Insured Retirement Institute’s Cathy Weatherford said that her organization supports the GAO’s findings that these annuity products help retirees maintain their income throughout their lifetime. This non-profit organization helps the insured retirement industry as a whole, including those selling annuity products and those buying them.
Two risks associated with annuities mentioned in the GAO’s report were that consumers could potentially buy an unsuitable annuity for them or they could make a withdrawal decision that is not in their best interest. This definitely happens, so the government recommends speaking with a financial expert about your individual situation and researching your product before making any final decision. The biggest risk to insurance companies is that they will not be able to meet their payout requirement if they aren’t careful with their financial hedging and the amount and type of annuities that they sell.
The IRI’s Weatherford boldly states that every single owner of an annuity product continued receiving their annuity payments throughout the entire financial crisis of the past half decade or so. Because of this, she believes that the federal and state regulations in place currently are very effective. Since variable annuities are classified as both securities and insurance, they are subject to the federal regulations on securities and the state regulations on insurance products. CDAs are a newer product that currently adheres to the state level insurance and annuity regulations. State guaranty funds don’t cover CDAs yet, but the National Association of Insurance Commissioners is working with states to see if they will cover this new deferred annuity as well. Variable annuities with GLWBs and CDAs are great for guaranteeing retirement income, just make sure you are aware of both the benefits and potential risks.
Written by Rachel Summit
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