Should Structured Product Annuities Be Classified as Variable or Fixed?

Voya Financial is now the fifth company to start offering structured product annuities.  AXA Equitable, Allianz Life, CUNA Mutual and MetLife already offer these so-called hybrid or buffered annuity products.  Structured product annuities are so new and unique that regulators are having a difficult time classifying them.  Investment News’ Darla Mercado talks about the struggle for regulators in the article “Structured product annuities pose challenges for regulators.”  Structured annuities have elements of both variable and fixed annuities, but are set up differently depending on the company that offers them.  By using structured products, your account absorbs any losses and still offers steady growth linked to an index.  You don’t get the potential for high accumulation in your account value like you do with variable annuities, but you also don’t get the loss potential either.  The fixed element of your structured product annuity varies depending on the carrier selling the product.

Based on their SEC filing at the end of May, Voya Financial plans to call their new structured product annuity the PotentialPlus Annuity.  The surrender period is eight years.  You have the choice to buffer 10%, 20% or 30% of your downside losses in this structured product annuity.  The details are not yet fully released to the public, but they will likely offer a choice between four different indexes.  There is also a death benefit that’s equal to the contract’s accumulation value.

Regulators are unsure whether they should classify these new structured product annuities like fixed annuity products or variable annuities.  The reason that this classification makes a difference is because of which reserves will apply to the products at a state level.  The reserve requirements for variable annuities are usually lower than they are for fixed annuities.  Deferred fixed annuities have to adhere to the standard non-forfeiture rule that guarantees a minimum interest rate.  These rates vary at the state level, but are typically below 3%.  As of now, structured annuities don’t have to follow the non-forfeiture rule.  The NAIC created a separate group to research this issue.  They are trying to determine whether separate laws are needed for structured product annuities and where the products stand when it comes to reserve and non-forfeiture laws.

Another issue that has arisen from these new structured annuities is how to collect data on them.  Morningstar collects information on variable annuities based on the subaccounts they have filed with the SEC.  But not all structured annuities have subaccounts attached to them.  The main differentiating factor between variable and fixed annuities is the safety of your principal.  Both AXA and Voya’s structured annuities are more like variable annuity products than they are fixed.  But some structured products guarantee your principal, so they could be classified like fixed annuities.  The challenge for regulators is whether or not they will be able to classify all structured annuities in the same way.  They might have to classify them on a case by case basis, which would make regulation much more difficult.  But companies need to know where they stand with both reserve and non-forfeiture laws when it comes to their structured annuity products.

Written by Rachel Summit

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