RETIREMENT 

SECURITY

Annuities with 

Guaranteed Lifetime 

Withdrawals Have 

Both Benefits and 

Risks, but Regulation 

Varies across States

Report to Congressional Requesters

December 2012

GAO-13-75

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-13-75, a report to 

congressional requesters 

December 2012 

RETIREMENT SECURITY

Annuities with Guaranteed Lifetime Withdrawals

Have Both Benefits and Risks, but Regulation Varies 

across States

Why GAO Did This Study

As older Americans retire, they may 

face rising health care costs, inflation, 

and the risk of outliving their assets. 

Those entering retirement today 

typically face greater responsibility for 

managing their retirement savings than 

those who retired in the past. Lifetime 

income products can help older 

Americans ensure they have income 

throughout their retirement. VA/GLWBs

and CDAs, two such products, may 

provide unique benefits to consumers. 

According to industry participants, 

while annuities with GLWBs have been 

sold for a number of years, CDAs are 

relatively new and are not widely 

available. GAO was asked to review 

issues relating to these financial 

products. This report (1) compares the 

features of VA/GLWBs and CDAs and 

examines potential benefits and risks 

to consumers and potential risks to 

insurers, and (2) examines the 

regulation of these products and the 

extent to which regulations address 

risks to consumers. GAO analyzed 

insurance company product 

information, proposed and final rules 

and regulations, and studies and data 

related to retirement and product sales. 

GAO also interviewed federal and state 

regulators and selected insurers, 

consumer advocates, and industry 

organizations. 

GAO provided a draft of this report to 

NAIC and SEC. Both provided 

technical comments, which have been 

addressed in the report, as 

appropriate.

What GAO Found

Annuities with guaranteed lifetime withdrawals can help older Americans ensure 

they do not outlive their assets, but do present some risks to consumers. Two 

such products, variable annuities with guaranteed lifetime withdrawal benefits 

(VA/GLWB) and contingent deferred annuities (CDA), share a number of features 

but have some important structural differences. For example, both provide 

consumers with access to investment assets and the guarantee of lifetime 

income, but while VA/GLWB assets are held in a separate account of the insurer 

for the benefit of the annuity purchaser, the assets covered by a CDA are 

generally held in an investment account owned by the CDA purchaser. 

Consumers can benefit from these products by having a steady stream of income 

regardless of how their investment assets perform or how long they live, while at 

the same time maintaining access to their assets for unexpected or other 

expenses. VA/GLWBs and CDAs are complex products that present some risks 

to consumers and require them to make multiple important decisions. For 

example, consumers might purchase an unsuitable product or make withdrawal 

decisions that could negatively affect their potential benefits. Several insurers 

and regulators GAO spoke to said it was important for consumers to obtain 

professional financial advice before purchasing these products and making key 

decisions. These products can also create risks for insurers which, if not 

addressed, could ultimately affect insurers’ ability to provide promised benefits to 

consumers.

VA/GLWBs are considered to be both securities and insurance products, and are 

therefore covered by both federal securities regulations and state insurance 

regulations. For CDAs, the National Association of Insurance Commissioners 

committee responsible for life insurance and annuities products has determined 

CDAs to be life insurance products subject to state law and regulation for 

annuities. According to SEC officials, existing CDAs have been registered as 

securities with SEC, and therefore are covered by both federal securities laws 

and regulations, and state insurance regulations. At the state level, NAIC has 

developed state disclosure and suitability regulations for annuity products. 

However, states differ on the extent to which they have adopted these annuity 

regulations, and some do not have protections at all. As a result, consumers in 

states that have adopted different regulations may benefit from different levels of 

protection. NAIC and state regulators told GAO that they are currently reviewing 

the regulations of CDAs. In March 2012, NAIC began reviewing existing annuity 

regulations to determine whether any changes are needed to address the unique 

product design features of CDAs, including potential modifications to annuity 

disclosure and suitability standards. It is also reviewing what kinds of capital and 

reserving requirements may be needed to help insurers manage product risk. In 

addition, NAIC and the National Organization of Life and Health Guaranty 

Associations are each working to determine whether state insurance guaranty 

funds, which protect consumers in the event insurers become insolvent, cover 

CDA products. Both agree that each state will have to reach its own conclusion 

about whether their particular state guaranty fund laws allow for CDA coverage. 

View GAO-13-75. For more information, Until these regulatory issues are resolved, consumers may not be fully protected. contact Alicia Puente Cackley at (202) 512-

8678 or cackleya@gao.gov. 
Page i GAO-13-75 Lifetime Withdrawal Products

Letter 1 

Background 3

Features of VA/GLWBs and CDAs May Benefit Consumers but also 

Pose Risks to Consumers and Insurers 7

Federal and State Oversight Varies by Type of Product and Is 

Currently under Industry Review 19

Agency Comments 29

Appendix I Objectives, Scope, and Methodology 30

Appendix II GAO Contact and Staff Acknowledgments 32

Table

Table 1: CDA Consumer Regulations in Sample States, as of 

October 2012 27

Figures

Figure 1: Accumulation, Withdrawal, and Insured Phases of a 

VA/GLWB or CDA 8

Figure 2: State Adoption of Suitability Regulations as of October 

2012 25

Contents 
Page ii GAO-13-75 Lifetime Withdrawal Products

Abbreviations 

CDA contingent deferred annuities

FINRA Financial Industry Regulatory Authority

IRA individual retirement account

NAIC National Association of Insurance Commissioners

NASD National Association of Securities Dealers

NOLHGA National Organization for life and Health Guaranty 

Associations

SEC Securities and Exchange Commission

VA variable annuities

VA/GLWB variable annuities with guaranteed lifetime withdrawal 

benefits

This is a work of the U.S. government and is not subject to copyright protection in the 

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without further permission from GAO. However, because this work may contain 

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Page 1 GAO-13-75 Lifetime Withdrawal Products

United States Government Accountability Office 

Washington, DC 20548

December 10, 2012

The Honorable Herb Kohl

Chairman

Special Committee on Aging

United States Senate

The Honorable George Miller

Ranking Member

Committee on Education 

and the Workforce

House of Representatives

Longevity risk, or the potential for outliving one’s financial resources in 

retirement, is a critical issue for today’s older Americans. Life expectancy 

for many older Americans grew significantly from 1980 to 2010, and 

today’s retirees may face a greater number of years than earlier 

generations for which they will require income. They also face the risks of 

inflation and rising health care costs. Because of a decrease in defined 

benefit retirement plans that guarantee retirees a certain level of income 

for life, workers entering retirement today also typically have more 

responsibility for managing their retirement savings than previous retirees 

and must make difficult investment and withdrawal decisions. 

Recent market turbulence has also sparked questions about retirement 

account values and longevity risk, and many Americans already retire 

without sufficient savings to sustain them throughout a lengthy retirement. 

For example, a recent study showed that only 42 percent of those 

surveyed had calculated how much in savings they would need for 

retirement, and the percentage of Americans saving for retirement had 

declined by 9 percent from 2009 to 2012.1

 

1

The Employee Benefits Retirement Institute and Matthew Greenwald and Associates, 

2012 Retirement Confidence Survey (Washington, D.C.: March 2012).

Products with guaranteed 

lifetime withdrawals, such as variable annuities with a guaranteed lifetime 

withdrawal benefits rider (VA/GLWB) and contingent deferred annuities 

(CDA) can potentially help older Americans plan for retirement and 

address longevity and market risks by providing guaranteed income even 

after retirement assets are depleted. However, some industry participants 

 
 

Page 2 GAO-13-75 Lifetime Withdrawal Products

suggest that VA/GLWBs and CDAs are complex products which involve 

potential risks for both consumers and insurers.

In response to questions you have raised about annuities with guaranteed 

lifetime withdrawals, this report:

• compares the features of VA/GLWBs and CDAs, and examines the 

potential benefits and risks to consumers and potential risks to 

insurers of these products; and

• examines the regulation of these products and the extent to which 

regulation addresses any identified risks to consumers. 

To compare the features of VA/GLWBs and CDAs, we analyzed specific 

insurance company products to obtain information on how the products 

function, including how investment gains and losses are treated, how 

withdrawal amounts are determined, and what happens when a 

consumer’s investment account is depleted. We also interviewed 

insurance company officials to verify our understanding of their products 

and VA/GLWBs and CDAs in general. To identify potential benefits and 

risks to consumers, we analyzed the product information we obtained and 

also interviewed insurers, consumer advocates, and state insurance 

regulators. To understand the potential risks these products pose to 

insurers and how they manage these risks, we also interviewed NAIC 

officials and reviewed information from insurers and stakeholder groups. 

We also obtained data from industry organizations on the sale of annuity 

products with guaranteed lifetime withdrawals. We discussed the sources 

and reliability of the data with officials from these organizations and found 

the data sufficiently reliable for the purposes of this report.

To determine how VA/GLWBs and CDAs are regulated and the extent to 

which regulation addresses identified concerns, we identified regulations 

and processes used by federal and state regulators, as well as any 

proposed regulations, and compared them with the risks to consumers 

that we identified as part of the work under the previous objective. We 

reviewed model laws developed by NAIC, specific state regulations, and 

SEC and FINRA rules. We also interviewed NAIC, state, SEC and FINRA 

officials to determine how VA/GLWBs and CDAs are regulated. We also 

interviewed other stakeholder groups, such as consumer advocates and 

industry organizations, to gain their perspective on issues related to 

regulation of lifetime income products considered in our review. Appendix 

I contains additional information on our scope and methodology.
 

Page 3 GAO-13-75 Lifetime Withdrawal Products

We conducted this performance audit from February 2012 to November 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

An annuity is an insurance agreement or contract that comes in a number 

of different forms and can help individuals accumulate money for 

retirement through tax-deferred savings, provide them with monthly 

income that can be guaranteed to last for as long as they live, or both. A 

variable annuity is an insurance contract in which a consumer makes 

payments that are held in a separate account of the insurer. While the 

insurance company is the owner of the separate account assets, the 

assets are held for the benefit of consumers. In return, the insurer agrees 

to make periodic payments beginning immediately or at some future date. 

The purchaser’s payments can be directed into a range of investment 

options, typically mutual funds, which the insurer makes available in a 

separate account for the benefit of consumers. Purchasers may withdraw 

assets from their contracts at any time prior to annuitizing—that is, to 

convert the account into some form of lifetime payments.

VA/GLWBs protect consumers against outliving their retirement assets 

and the effects that market losses on those assets can have on lifetime 

income by allowing them to withdraw a certain percentage each year until 

death. If the market performs well, the consumer may receive larger 

withdrawals, but if the market performs poorly, the consumer still receives 

the set withdrawal amount. 

VA/GLWB sales have grown in recent years. Data from LIMRA show that 

from 2008 to 2011, the number of VA/GLWB contracts in force rose from 

1.5 million to 2.8 million and that average annual sales were around $58 

billion.2

 

2

LIMRA is a financial research firm that provides consulting and research services to its 

over 850 member financial services firms.

During that same period, total VA/GLWB assets held in insurers’ 

Background

Annuities
 

Page 4 GAO-13-75 Lifetime Withdrawal Products

accounts increased from $133 billion to $323 billion. According to the 

Insured Retirement Institute, states with the highest sales of variable 

annuities in 2010 were California, New York, Florida, Texas, 

Pennsylvania, and New Jersey.3

Like a GLWB rider, a CDA is an insurance contract that provides 

guaranteed lifetime income payments if a consumer’s investment account 

is exhausted, whether through withdrawals or poor market performance. 

In this case, the investment account contains the “covered assets”— 

typically mutual funds or managed accounts. However, the insurance 

company does not have ownership of the assets underlying the CDA, 

which are typically held in brokerage or investment advisory accounts 

owned by the CDA purchaser. Similar to a VA/GWLB, a CDA contract 

defines how much a consumer is able to withdraw—for example, 5 

percent of the benefit base annually. Even if the value of the covered 

assets drops to zero, the insurance company has guaranteed the 5 

percent withdrawal benefit (based on the benefit base value when lifetime 

withdrawals began) and continues making the annual payments to the 

consumer. Whether or not a policyholder receives payment from the 

insurance company selling the CDA is contingent upon the covered 

assets dropping to zero. On the basis of the products we reviewed, fees 

on CDAs are calculated as a set percentage of the investment assets or 

benefit base per year. These fees do not include any fees the consumer 

might pay related to the underlying investment that is covered by the

CDA. Such investment management fees are paid to the investment 

company, not the insurer. 

In addition, LIMRA data on the 

demographics of VA/GLWB consumers show that in 2010 the average 

age of the consumer purchasing a VA/GLWB was 61 and the average 

age at first withdrawal was 68. Typically, the average annual withdrawal 

has been around $5,500. Also according to LIMRA, the average amount 

of a VA/GLWB contract sale from 2007 through 2010 was around 

$106,000.

 

3

The Insured Retirement Institute is a trade association that provides research and 

information to its members, including financial firms and advisors. 
 

Page 5 GAO-13-75 Lifetime Withdrawal Products

State insurance regulators are responsible for overseeing insurance 

products, while SEC and FINRA are responsible for the oversight of 

securities. Federal and state regulators consider variable annuities to be 

both insurance and securities products, and GLWB riders that are 

attached to variable annuities to be an additional insurance benefit. The 

National Association of Insurance Commissioners committee responsible 

for life insurance and annuities products has determined CDAs to be life 

insurance products subject to state law and regulation for annuities. 

According to SEC officials, existing CDAs have been registered as 

securities with SEC, and therefore are covered by both federal securities 

laws and regulations, and state insurance regulations.

Insurance is unique among financial services in the United States in that it 

is largely regulated by the states. State insurance regulators are 

responsible for enforcing state insurance laws and regulations, including 

those covering the licensing of agents, reviewing insurance products 

(including variable annuities) and their rates, and examining insurers’ 

financial solvency and market conduct. State regulators typically perform 

financial solvency examinations every 3 to 5 years, and they generally 

undertake market conduct examinations in response to specific consumer 

complaints or regulatory concerns.4

Federal securities laws and SEC rules govern the securities industry in 

the United States. SEC’s mission is to protect investors; maintain fair, 

State regulators also monitor the 

resolution of consumer complaints against insurers. State insurance laws 

focus on solvency, market regulation, and consumer protection. In 

addition to state insurance regulators, NAIC—a voluntary association of 

the heads of insurance departments from the 50 states, the District of 

Columbia, and five U.S. territories—plays a role in insurance regulation. 

While NAIC is not a regulator, it provides guidance and services designed 

to more efficiently coordinate interactions between insurers and state 

regulators. These services include providing detailed insurance data to 

help regulators understand insurance sales and practices; maintaining a 

range of databases useful to regulators; and coordinating regulatory 

efforts by providing guidance, model laws and regulations, and 

information-sharing tools.

 

4

State regulators periodically perform financial examinations of insurance companies to 

investigate their accounting methods, procedures, and financial statement presentation. 

Market conduct exams by state regulators help ensure fair and reasonable insurance 

prices, products, and trade practices to protect consumers. 

Regulation
 

Page 6 GAO-13-75 Lifetime Withdrawal Products

orderly, and efficient markets; and facilitate capital formation. SEC 

oversees key participants in the securities markets, including securities 

exchanges, securities brokers and dealers, investment advisers, and 

mutual funds. The Securities Act of 1933 (1933 Act) regulates public 

offerings of securities, requiring that issuers register securities with SEC 

and provide certain disclosures, including a prospectus, to investors at 

the time of sale.5

 Investors may rely on broker-dealers and investment 

advisers for information or advice about securities, including insurance 

products such as VA/GLWBs and CDAs. Money managers, investment 

counselors, and financial planners who, for compensation, engage in the 

business of providing advice to others about securities, including asset 

allocation advice, are subject to the antifraud provisions of the Investment 

Advisers Act of 1940.6

 Large investment advisers, those with $100 

million or more of assets under management, generally are subject to 

SEC registration and regulation under the Investment Advisers Act and 

accompanying rules. Investment advisers with assets under 

management of less than $100 million generally are regulated by the 

states.7

 

5

Securities Act of 1933, 48 Stat. 74 (1933) (codified as amended at 15 U.S.C. §§ 77a et 

seq.). 

 Securities, including annuities that are securities, are subject to 

registration and disclosure requirements under the 1933 Act, and large 

investment advisers providing advice about securities must be registered 

with SEC. Broker-dealers that are engaged in the business of buying and 

selling securities generally are subject to broker-dealer regulation at the 

federal and state levels. FINRA is the largest regulator of securities firms 

doing business with the public in the United States. All registered 

securities broker-dealers who do business with the public must be 

members of FINRA and their personnel must be licensed with FINRA. 

FINRA oversees almost 4,500 brokerage firms and approximately 

630,000 registered securities representatives. 

6

Investment Advisers Act of 1940, 54 Stat. 847 (1940) (codified as amended at 15 U.S.C. 

§§ 80b-1 et seq.). 

7

The Investment Advisers Act of 1940 was amended by the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (Dodd-Frank) to provide that midsized investment 

advisers, those managing assets between $25 million and $100 million, generally be 

exempt from federal registration requirements and subject to state regulation. Small 

investment advisers managing assets under $25 million were already exempt from federal 

registration requirements under the Investment Advisers Act prior to Dodd-Frank.
 

Page 7 GAO-13-75 Lifetime Withdrawal Products

VA/GLWBs and CDAs share a number of features, but they also have 

some important structural differences. For example, both provide 

consumers with access to investment assets and the guarantee of lifetime 

income, but while VA/GLWB assets are held in a separate account of the 

insurer for the benefit of the annuity purchaser, the assets covered by a 

CDA are generally held in an investment account owned by the CDA 

purchaser. In part because of their shared features, these products can 

provide similar benefits to consumers. Yet as complex instruments that 

require consumers to make multiple important decisions, they also 

present certain risks to consumers. VA/GLWBs and CDAs may also 

involve risks for insurers, who must manage these risks in order to make 

promised payments to consumers.

VA/GLWBs and CDAs share a number of product features. In general, 

both allow consumers to take lifetime withdrawals from their assets at a 

rate that the insurance company guarantees even if such withdrawals and 

investment losses deplete the consumer’s assets. VA/GLWBs and CDAs 

generally have three distinct phases of ownership: an accumulation 

phase, a withdrawal phase, and an insured phase (see fig. 1).8

 

8

One insurance company whose products we reviewed referred to the insured phase as 

the “settlement phase.” The American Council of Life Insurers and the Insured Retirement 

Institute refer to it as the “annuity payments phase.” 

Features of 

VA/GLWBs and CDAs 

May Benefit 

Consumers but also 

Pose Risks to 

Consumers and 

Insurers

VA/GLWBs and CDAs 

Share Some Features
 

Page 8 GAO-13-75 Lifetime Withdrawal Products

Figure 1: Accumulation, Withdrawal, and Insured Phases of a VA/GLWB or CDA

Note: This figure is a hypothetical illustration of the phases and features of a VA/GLWB or CDA and 

may not represent the actual results of any product we reviewed. The actual results for each 

consumer will depend on the particular product’s features and costs, as well as factors such as the 

amount invested, the consumer’s age when the guarantee was purchased, the actual return on 

investments, the timing and amount of withdrawals, and how long the consumer lives. 

The accumulation phase begins when a consumer purchases a 

VA/GLWB or CDA contract.9

 

9

The VA/GLWBs we reviewed are allowed to be added either when annuity contracts are 

first purchased, on a contract’s first anniversary, or anytime after the contract’s issue date 

subject to availability and the consumer’s eligibility. The CDAs we reviewed can be 

purchased when eligible investment funds are purchased. While some products we 

reviewed had no minimum eligibility age for purchasing the VA/GLWB or CDA, others had 

established minimums that ranged from ages 35 to 50. According to LIMRA, consumers 

initially purchase VA/GLWB contracts at about age 61. 

The initial premium paid under a VA contract 

with a GLWB rider or the value of assets covered by a CDA contract 

establishes the initial withdrawal value, or benefit base, on which the 

Accumulation Phase
 

Page 9 GAO-13-75 Lifetime Withdrawal Products

amount of lifetime withdrawals are based.10 This benefit base is not a 

cash value that can be withdrawn, but rather is the amount to which 

lifetime withdrawal percentages will be applied during the withdrawal 

phase. The investment account value, on the other hand, represents the 

total value of the consumer’s investments, which is increased by 

investment gains and decreased by fees, withdrawals, and any 

investment losses.11 During this phase the consumer decides how to 

allocate investment assets among various options, including funds made 

available by an insurance company for investment under its VA/GLWB 

products and funds that an insurance company has agreed to cover 

under its CDA products.

12 Also during this phase, the insurance company 

monitors each consumer’s account value and automatically adjusts the 

benefit base periodically should investment gains increase the value of 

this account. This feature, which exists for the VA/GLWBs and CDAs we 

reviewed, is referred to as a step-up or ratchet.13

Some VA/GLWBs have an additional feature that guarantees that, no 

matter how the investments perform, the benefit base will grow each year 

by a set percentage. This guaranteed percentage, alternatively referred to 

as a roll-up rate, growth credit, or bonus, is added to the benefit base, as 

adjusted for any prior step-ups. For example, some of the VA/GLWBs we 

reviewed included annual roll-up rates that ranged from 5 to 7 percent. 

The amount of the roll-up rate and the frequency, duration, and manner of 

Once a consumer’s 

benefit base is stepped up, it cannot later decline because of investment 

losses that reduce the consumer’s investment account value.

 

10The minimum initial premium or investment in the VA/GLWBs and CDAs we reviewed 

ranged from no minimum to $100,000 with maximums that ranged from $500,000 to $5 

million. According to LIMRA, the average initial premium paid for a variable annuity with a 

GLWB rider is about $100,000.

11The investment account value may be greater or less than the benefit base.

12The number of investment options available under the VA/GLWBs and CDAs we 

reviewed ranged from 1 to over 100 different funds. 

13The VA/GLWBs and CDAs we reviewed stepped up benefit base values to either the 

highest daily, monthly, or annual account value. For example, on each contract 

anniversary an insurer may compare the benefit base to the account value at the end of 

each of the past 12 months and step up the benefit base to the highest of those 12 values. 

A more frequent step-up may increase the chances of locking in investment gains, but the 

level of these gains, and thus the value of a more frequent step-up, may be affected by 

the nature of the funds and any investment limitations, restrictions, and nondiscretionary 

asset reallocation formulas used by the insurance company to manage market risks and 

volatility.
 

Page 10 GAO-13-75 Lifetime Withdrawal Products

calculation can affect the value of a consumer’s benefit base and thus the 

amount that can be taken as lifetime withdrawals. While such features 

can increase a consumer’s benefit base on which lifetime withdrawals are 

determined, annuities with higher roll-up rates can have higher fees.

The withdrawal phase starts when a consumer begins taking annual 

lifetime withdrawals. The maximum amount of lifetime withdrawals that a 

consumer can take each year (without incurring a reduction in their 

benefit base) is calculated as a percentage of the consumer’s benefit 

base at the time of the first lifetime withdrawal. The VA/GLWBs and CDAs 

we reviewed had withdrawal percentages for a single life that ranged from 

3 percent to over 8 percent of the benefit base, and the percentages were 

generally lower for younger consumers and higher for older consumers.

14

Some products also have a joint life option where, if the consumer dies, 

the guarantee of lifetime income passes to their spouse. When such an 

option is elected, withdrawal amounts are typically one-half a percent less 

than they would be otherwise.15

Step-ups, like those during the accumulation phase, can increase the 

benefit base after lifetime withdrawals have begun, increasing the amount 

of annual lifetime withdrawals. Typically, the insurance company will 

increase the benefit base if a consumer’s account value, net of 

withdrawals and fees, has increased above this amount. After a step-up 

during the withdrawal phase, the base and the lifetime maximum 

withdrawals cannot decline because of investment losses that reduce the 

consumer’s account value. Step-ups that occur after lifetime withdrawals 

 

14Two products we reviewed (one VA/GLWB and a CDA) set withdrawal rates based on a 

combination of age and the 10-year Treasury bond yield at the time of the owner’s first 

withdrawal. The older the owner and the higher the 10-year bond yield results, the higher 

the withdrawal rates. 

15The joint life withdrawal rates for one of the VA/GLWB products we reviewed were the 

same as for a single life, except that the withdrawal percentage was based on the younger 

of the two lives. Another VA/GLWB product we reviewed, whose withdrawal rates were 

based on the 10-year Treasury bond yield, set the joint life withdrawal rates at 90 percent 

of the single life rates.

Withdrawal Phase
 

Page 11 GAO-13-75 Lifetime Withdrawal Products

begin allow consumers to benefit from investment gains that can offset 

the effects of inflation.16

A consumer enters the insured phase only if their investment account 

value has been reduced to zero as a result of lifetime withdrawals; 

investment losses; or any expenses, fees, or other charges. In such 

cases, the consumer’s benefit base on which lifetime withdrawals are 

determined (the amount to which the withdrawal percentage is applied) 

remains unchanged but the consumer’s investment account value, which 

was the source for the funds previously withdrawn, is zero. Consequently, 

the funds needed to continue paying the same level of benefits to the 

consumer (and spouse, if a joint life option is elected) would then come 

from the insurance company’s own assets, and consumers receive 

payments from the insurance company that are equal to their prior lifetime 

withdrawal amount. Once the insurance company begins paying the 

agreed-upon withdrawal payment, the fees that the consumer had been 

paying for that protection would cease, as would any investment 

management and other fees paid for other benefits. Once the insured 

phase begins, all rights and benefits under a VA/GLWB or CDA contract, 

except those related to continuing benefits, terminate.17 In addition, all 

lifetime withdrawal benefits will continue to be paid to the consumer on 

the established schedule and generally cannot be changed.

Although VA/GLWBs and CDAs have some common features and 

function in similar ways, the contractual, product, and cost structures 

differ in terms of where the underlying investment assets are held and 

what benefits are offered, and the amount of fees charged for those 

benefits. With variable annuity contracts, including those with GLWB 

riders, consumers can direct premium payments into a range of 

investment options, typically mutual funds made available by and held in 

 

16The withdrawal percentages for some VA/GLWB and CDA products we reviewed can 

increase when an owner enters a new age band preceding a step-up of the benefit base.

VA/GLWB and CDA products that base the withdrawal percentage on the 10-year 

Treasury bond yield and recalculate the owner’s withdrawal amount based on the current 

bond yield potentially provide a more direct connection between increases in future 

withdrawal amounts and long-term inflation to the extent that 10-year Treasury bond yields 

vary with inflation or inflationary expectations. 

17For example, the right to make additional contributions and receive the benefit of future 

step-ups in the withdrawal amount would no longer be available to an owner once the 

account is depleted.

Insured Phase

Structural Differences 

Exist between VA/GLWBs 

and CDAs
 

Page 12 GAO-13-75 Lifetime Withdrawal Products

a separate account of the insurance company. The mutual funds may be 

managed by outside advisers, but the insurance company holds these 

assets for the benefit of consumers. By comparison, the investment 

assets covered by a CDA are held by the consumer in his or her own 

brokerage or investment advisory account and invested in investment 

funds, such as mutual funds, that the insurance company has agreed to 

cover under a CDA. The investment assets are not owned—nominally or 

otherwise—by the insurance company issuing the guarantee. Like the 

investment options available under a VA/GLWB, the investment assets 

covered by a CDA may or may not be managed by the insurance 

company or an affiliate. In this way, consumers can accumulate 

retirement assets in a personal account, such as an individual retirement 

account (IRA), and obtain lifetime withdrawal guarantees without having 

to transfer those assets to an insurance company.

Further, the base variable annuity contracts to which GLWB riders are 

attached provide additional benefits not available under CDAs. For 

example, a VA/GLWB contract permits the consumer to annuitize an 

account balance in the future and receive benefit payments from the 

insurance company for life at rates set forth in the annuity contract.18

Also, with a VA/GLWB, if a consumer dies before annuitizing the account 

balance or taking lifetime withdrawals, the death benefit payable to 

beneficiaries is typically the greater of the sum of premiums paid or the 

investment account value.19

 

18Guaranteed lifetime withdrawal benefits terminate upon annuitization of the base 

contract’s account value. Further, the VA/GLWBs we reviewed had maximum annuity 

commencement ages of either 91 or 95. At those ages, annuitants are typically required to 

annuitize their remaining account balance or take a lump sum distribution. For all but one 

of the products we reviewed, in cases where an owner starts taking lifetime withdrawals 

and later reaches the maximum annuity commencement age, the lifetime withdrawal 

payments cease and the annuity payments would be calculated as the greater of the 

lifetime withdrawal amount or the annuity amount for the selected payment option under 

the contract. 

The additional VA/GLWB benefits come with 

additional costs, however. For example, in addition to the guarantee fee, 

variable annuity contracts with death benefits entail additional fees to 

cover the cost to the insurer. For the CDAs we reviewed, the assets 

covered by the CDA could not be annuitized in the future. The assets 

19To illustrate, if an owner who paid $200,000 in premiums had investments that had 

declined in value to $190,000 at the time of their death, and had not annuitized their 

account balance or begun taking lifetime withdrawals, the insurance company would pay 

the owner’s beneficiaries $200,000.
 

Page 13 GAO-13-75 Lifetime Withdrawal Products

would first have to be sold and the proceeds used to purchase a separate 

annuity. In addition, unlike a variable annuity contract, a CDA does not 

have a death benefit.20

Similar to other annuity products, VA/GLWBs and CDAs can provide 

consumers with the benefit of a guaranteed stream of income for life. That 

is, for a fee, they can ensure that consumers receive a minimum annual 

payment until they die, regardless of how long they live or how their 

investment assets might perform. These products may also lock 

investment gains into the benefit base on which future lifetime 

withdrawals are determined and, in the case of variable annuities, also 

offer other potentially beneficial features such as death benefits, which 

pass on certain guaranteed amounts to a spouse or other beneficiaries. 

Further, VA/GLWBs and CDAs typically offer consumers the ability to 

invest their assets in a variety of investment funds.

A unique benefit of these products is that they allow consumers to receive 

income guarantees while still maintaining ownership of and access to their 

funds during the accumulation and withdrawal phases. With traditional 

annuity products, in order to receive lifetime income consumers must 

transfer assets to the insurer, who holds them in their own general account 

and uses them to fund an annuity (they are annuitized). Consequently, 

once these assets are annuitized the consumer does not have access to 

these assets. With VA/GLWBs and CDAs, however, the consumers’ assets 

are not annuitized. As a result, consumers can withdraw any or all of their 

funds at any time. This can benefit consumers should they need funds for 

unexpected uses, such as medical or other expenses.

One benefit specific to CDAs is that the guarantee of lifetime withdrawals 

can, in certain cases, be applied to existing investment assets. That is, 

consumers who have existing investment assets may be able to purchase 

a CDA to cover those assets, if an insurer agrees to cover those assets 

under a CDA. If the same consumers wanted to use those assets to 

obtain a guaranteed stream of income through a traditional annuity, they 

would have to first sell the investment assets and then use the proceeds 

to purchase the annuity.

 

20For the VA/GLWB and CDA products we reviewed, if the consumer elects a joint life 

withdrawal option, upon their death during the accumulation phase surviving spouses 

typically could elect to continue the guarantee and maintain the benefit base. 

VA/GLWBs and CDAs Can 

Provide Consumers with 

Similar Benefits
 

Page 14 GAO-13-75 Lifetime Withdrawal Products

Several insurers and regulators we spoke with said that VA/GLWBs and 

CDAs are complex products, and emphasized the importance of obtaining 

professional financial advice before purchasing these products and

making key decisions. Consumers that purchase VA/GLWBs and CDAs 

can face risks similar to those they may face with the purchase of other 

financial products. These risks include purchasing an unsuitable product, 

paying too much, making withdrawal decisions that decrease benefits, 

and having an insurer become insolvent before benefits are received.

First, consumers face the risk of purchasing an unsuitable product if they 

do not understand how a particular product functions and meets their own 

needs, including how much might be appropriate to invest in a particular 

product. Insurers with whom we spoke said that VA/GLWBs and CDAs 

are generally attractive to middle-income consumers who want more 

control and flexibility over the investments they are relying on to provide 

retirement income. In addition, one insurer with whom we spoke said that 

consumers investing in such products have generally had around 

$500,000 in retirement savings and invested around 20 percent of that 

amount. 

Second, consumers may face the risk of being unable to determine if they 

are obtaining the best price for similar benefits provided by different 

insurers. Several insurers and regulators told us that because of the 

uniqueness of VA/GLWB and CDA products, it would be difficult to 

compare one insurer’s product to that of another insurer. For example, 

products can function in slightly different ways, have different 

combinations of features, and charge different amounts for the 

guarantees. As a result, consumers would find it difficult to take a price 

quoted to them from one insurer for a specific product with specific 

features, then compare that to a product from another insurer to 

determine if they could receive similar benefits at a lower price.

Third, VA/GLWBs and CDAs pose a risk that certain decisions by 

consumers in withdrawing their assets, such as the timing and size of the 

withdrawals, could affect them negatively. For example, these decisions 

can reduce or even eliminate guaranteed benefits and result in additional 

fees that further reduce their assets. The investment assets underlying 

VA/GLWB and CDA guarantees are typically available for withdrawal 

before guaranteed lifetime withdrawals begin, but taking withdrawals too 

early or above certain thresholds can result in financial penalties and 

deplete assets, as the following examples illustrate,

Consumers Face Risks 

When Purchasing and 

Withdrawing Funds from 

VA/GLWBs and CDAs
 

Page 15 GAO-13-75 Lifetime Withdrawal Products

• Variable annuities are frequently sold without any up front sales 

charges but impose contingent deferred sales charges, or “surrender” 

charges, on withdrawals taken during the early years of the contract 

(for example, the first 7 years) that are above a “free” withdrawal 

limit.21 Surrender charges on variable annuities are expressed as a 

series of percentages that decline over time and are applied to annual 

withdrawals that are typically greater than either accumulated 

earnings or 10 percent of premiums paid.22 Because CDAs split 

insurance and investment elements of the guarantee, there are no 

surrender charges on the CDA contract. However, a surrender charge 

may apply when a consumer sells shares of mutual funds covered by 

the CDA contract.23 In addition to sales charges, income taxes and an 

additional 10 percent penalty tax on withdrawals taken before age 

591⁄2 may apply.24

• With some VA/GLWB products, taking withdrawals of any amount 

after reaching a minimum age can trigger the beginning of lifetime 

withdrawals (at a specified percentage) and stop all future roll-ups of 

the benefit base.25

 

21A “free” withdrawal limit is an amount below which consumers may take withdrawals 

without penalty.

In addition, a consumer who takes withdrawals 

sooner than initially planned can experience a permanent reduction of 

the lifetime withdrawal amount. For example, for one of the products 

we reviewed a withdrawal at age 64 triggers the establishment of a 4 

percent lifetime withdrawal percentage, but waiting for a year would 

raise the percentage to 5 percent. Further, starting lifetime 

withdrawals during a downturn in the market can have a negative 

22The period during which surrender charges are assessed typically varies from 3-7 years 

according to the variable annuity share class. For example, some variable annuities we 

reviewed had 7-year surrender charge periods with first-year surrender charges of 

between 7 and 8.5 percent that declined to 0 percent over 7 years. The free withdrawal 

limit for the annuities of this type that we reviewed was either 10 percent of premiums paid 

or the greater of either accumulated earnings or 10 percent of premiums paid. 

23Surrender charges are a form of sales charges that are levied on annuities and mutual 

funds and are used to pay commission expenses.

24Some of the products we reviewed established age 591⁄2 as the minimum age when 

guaranteed lifetime withdrawals could begin. Withdrawals made earlier than the minimum 

age may reduce the benefit base on which lifetime withdrawals are calculated. 

25Owners of the VA/GLWB and CDA products we reviewed that did not have a roll-up 

feature could not trigger the lifetime withdrawal percentage merely by taking withdrawals 

but had to affirmatively elect to take lifetime withdrawals before they became effective.
 

Page 16 GAO-13-75 Lifetime Withdrawal Products

effect on lifetime income because the investment account balance will 

be that much lower than the benefit base, making the possibility of a 

step-up, and a possible increase in the withdrawal percentage and 

amount, less likely. 

• The age at which lifetime withdrawals begin can have an impact on 

the value of other benefits and guarantees. For example, withdrawals 

and the related charges can reduce the cash value and death benefits 

under a variable annuity contract, leaving fewer assets available for 

surviving spouses and other beneficiaries. On the other hand, waiting 

too long to withdraw benefits can result in not living long enough to 

benefit from the product’s guarantees or receiving enough income to 

offset the amount of fees paid. For example, a person who first 

purchases a VA/GLWB or CDA at age 60 and waits until age 85 to 

begin taking lifetime withdrawals will be able to take a higher amount, 

but likely for a shorter period of time. Further, the purchaser will have 

paid fees for 25 years to protect against outliving his assets, a 

possibility that becomes less likely over time.

In addition to deciding when to begin taking lifetime withdrawals, 

consumers need to decide how much to withdraw and need to be aware 

of certain product features when doing so. For example, lifetime 

withdrawals above the maximum annual amount specified in the 

withdrawal guarantee are permitted and are referred to as “excess 

withdrawals.” However, such withdrawals typically reduce the benefit 

base to which withdrawal percentages are applied, thus reducing future 

annual withdrawal amounts. Further, guarantee fees and other charges 

are typically not counted as withdrawals for purposes of calculating the 

maximum for a given year, but some VA/GLWB and CDA products we 

reviewed counted certain fees and charges or those above a certain 

threshold toward the annual lifetime withdrawal maximum.

Finally, as with the purchase of any long-term insurance product, 

consumers can face some level of risk that by the time the consumer 

needs the benefit promised by the insurer, the insurer may not be able to 

provide it. However, insurers and insurance regulators take a number of 

steps to ensure that insurers remain financially solvent. In addition, in the 

event of an insurer’s insolvency, state insurance guaranty funds can help 

pay consumers what was promised by insurers, up to any coverage limits 

of those guaranty funds. According to officials from the National 

Organization for Life and Health Guaranty Associations (NOLHGA), while 

promises made under GLWBs, which are distinct from the investment 

portion of a variable annuity, are generally covered by state guaranty 
 

Page 17 GAO-13-75 Lifetime Withdrawal Products

funds, such certainty does not exist with respect to CDAs. As a result, a 

risk exists that if an insurer who sold a CDA became insolvent, 

consumers owning those CDAs might not collect any promised benefits.

As with the sale of life insurance products in general, insurers must 

manage the financial risks associated with VA/GLWBs and CDAs in order 

to ensure their ability to make promised payments and, depending on the 

amount of such products they sell, their financial solvency. Risks to 

insurers can arise when investment returns, interest rates, consumer 

longevity, and consumer behavior are different from what they expected.

While a number of insurers and NAIC officials said that VA/GLWBs and 

CDAs do not pose undue risk to insurers, as we noted, at least one major 

insurer has decided not to sell CDAs because of the potential risk 

involved, and another insurer told us that they do not sell VA/GLWBs 

because they do not fit with the company’s risk profile.

Insurance company officials with whom we spoke told us that in designing 

their products they consider not only the features that will help to meet

consumer needs, but also the company’s own appetite for certain risks, 

the methods for managing those risks, and the price charged for the 

products’ guarantees. According to insurers with whom we spoke, ways in 

which insurers can use product design to help manage their risk can 

include the following.

• Establishing the minimum age at which consumers can begin taking 

withdrawals and the extent to which consumers can benefit from 

growth in the investments protected by the guarantee.

• Specifying which investments consumers may have covered by the 

products’ guarantees. For example, one CDA product we reviewed 

limited a consumer’s investments in equity funds to no more than 80 

percent of the consumer’s total investment account value. Another 

insurer that sells CDAs told us that they were only willing to cover 

index funds for major, highly traded indices, such as the Standard and 

Poor’s 500.26

 

26The Standard and Poor’s 500 is an index of 500 U.S. company stocks from various 

industries that meet certain criteria for inclusion in the index, including a market 

capitalization in excess of $4 billion.

Insurers Must Also Manage 

Risks Associated with 

VA/GLWBs and CDAs
 

Page 18 GAO-13-75 Lifetime Withdrawal Products

• Determining the formulas used to rebalance consumers’ investments 

into and out of fixed-income funds to mitigate some of the financial 

risks associated with providing lifetime withdrawal guarantees.27

Insurers will also price their products to ensure they have sufficient 

revenue and capital to pay for the expenses they expect to incur related 

to the products they sell. That is, they will charge more for products that 

they deem to be more risky or on which they expect to incur greater 

costs. With respect to VA/GLWBs and CDAs, for example, insurers may 

charge higher fees for products with features that can result in a higher 

guaranteed benefit base. Insurers also use hedging programs to help 

further manage the investment risks of the assets underlying the 

VA/GLWB and CDA. Hedging involves buying financial instruments, such 

as options, to offset the potential loss on an investment.

Prospectuses for these VA/GLWB products disclose that the 

automatic rebalancing feature may limit the consumer’s participation 

in future market gains and, therefore, the potential for future increases 

in their annual lifetime income.

To the extent that product design and hedging is not sufficient, insurers 

can also manage financial risks by modifying their products after they 

have been purchased by consumers to the extent permitted by their 

contracts, their prior disclosure, and applicable law. For the VA/GLWB 

and CDA products we reviewed, insurers sometimes reserve certain

rights, such as the right to determine which investment funds will be 

covered by a GLWB rider or CDA guarantee and the conditions 

surrounding the allocation of a consumer’s investment assets, change the 

frequency and amount of a guarantee fee, or reject additional 

contributions or transfers. Some insurers have recently raised fees on 

VA/GLWB guarantees or stopped accepting additional contributions to 

existing contracts in response to changing market conditions. Insurers 

generally cannot change the roll-up, step-up, or withdrawal rates for 

existing contract holders, but can make these changes prospectively for 

new customers.

 

27There are various factors that determine the amount and timing of transfers, including 

the difference between an owner’s account value and benefit base. Insurance company

officials told us that owners who invest more aggressively can expect more frequent 

rebalancing than those who invest more conservatively.
 

Page 19 GAO-13-75 Lifetime Withdrawal Products

Federal disclosure and suitability regulations apply to the offer, 

recommendation, and sale of securities products such as variable 

annuities, including variable annuities with GLWB riders. While it has long 

been accepted that variable annuities constitute securities under the 

federal laws, because CDAs are a relatively new product, analysis under 

the federal securities law is less developed. However, SEC officials have

said that CDAs currently being offered in the retail market are being 

registered as securities and are therefore covered by federal securities 

law and state insurance regulations. In addition, NAIC has developed 

annuity disclosure and suitability regulations for use at the state level, but 

state adoption and protection levels vary, so CDA consumers may not be 

uniformly protected. Further, questions about the adequacy of existing 

annuity regulation and the applicability of state insurance guaranty funds 

for CDA consumers if insurers become insolvent have prompted industry 

oversight reviews, which were ongoing as of October 2012.

Federal disclosure and suitability regulations apply to the offer, 

recommendation, and sale of securities products such as variable 

annuities, including variable annuities with GLWB riders. These 

requirements aim to inform consumers about products and ensure that 

the products themselves are reasonably appropriate for consumers 

before they are purchased. As previously noted, while it has long been 

accepted that variable annuities constitute securities under federal law, 

CDAs are a relatively new product and analysis under the federal 

securities law is less developed.28

The 1933 Act generally requires issuers of securities that are offered to 

the public to register them with SEC and make certain disclosures 

through a prospectus that has been filed with SEC. The 1940 Act 

To our knowledge, no court has 

addressed the securities law treatment of CDAs, and SEC has not 

provided written guidance with respect to the status of CDAs under the 

federal securities laws. However, according to SEC officials, existing 

CDAs have been registered under the Securities Act of 1933, absent 

specific exemptions from registration such as the exemption for contracts 

sold to certain types of tax-qualified retirement plans, and are therefore

covered by federal securities law and state insurance regulations. 

 

28See SEC v. United Benefit Life Ins. Co., 387 U.S. 202 (1967); SEC v. Variable Annuity 

Life Ins. Co., 359 U.S. 65 (1959) (variable annuities are securities).

Federal and State 

Oversight Varies by 

Type of Product and 

Is Currently under 

Industry Review

Federal Disclosure and 

Suitability Regulations 

Apply to Registered 

Annuity Products
 

Page 20 GAO-13-75 Lifetime Withdrawal Products

generally requires investment companies, including separate accounts 

that fund variable annuities, to be registered under the Act. Pursuant to 

these requirements, SEC has issued rules and standards for 

prospectuses offering registered variable annuities. The purpose of these 

requirements is to ensure that investors receive descriptive information on 

basic product features, fees, benefits, and risks that can help inform their 

investment decisions.29 Disclosures made through prospectuses filed with 

SEC under the federal securities laws are subject to the anti-fraud 

provisions of the 1933 Act, which prohibit material misrepresentations or 

omissions and provide a general anti-fraud remedy for purchasers and 

sellers of securities.30

Since variable annuities, including those with guaranteed benefits, are 

securities, they must be offered and sold through registered brokerdealers. On the basis of anti-fraud provisions of the federal securities 

laws and FINRA rules, broker-dealers are required to deal fairly with their 

customers and only recommend securities to an investor that are 

appropriate for the investor based on his or her individual facts and 

circumstances. The suitability obligation is part of a broker-dealer’s duty 

of fair dealing.31

 

29SEC Form N-4, the form used to register variable annuities with the SEC, is filed under 

the Investment Company Act of 1940 and the Securities Act of 1933 and subject to review 

by SEC staff. Part A of the form, the product prospectus, must present clearly written 

information about the contract and its costs, including information about annuity payments 

and death benefits. Part B includes information about premiums and underwriters, as well 

as insurance company and separate account financial statements. Part C contains 

information about directors and officers of the insurance company and indemnification, 

and a representation regarding contract fees.

SEC and FINRA rules also require communications used 

with investors to promote the offer and sale of variable annuities to be fair 

and balanced, not misleading, and to include certain disclosures 

regarding the risks and fees associated with these products. These rules 

include the following:

30See §17 of the Securities Act of 1933 (15 U.S.C. §77q); §10(b) of the Securities 

Exchange Act of 1934 (15 U.S.C. 78j(b)).

31SEC staff has recommended consideration of rulemakings that would apply a fiduciary 

standard to both broker-dealers and investment advisers no less stringent than that 

applied currently to investment advisers. The SEC staff also identified certain areas 

where laws and regulations that apply to broker-dealers and investment advisers differ, 

and recommended the Commission consider whether these areas should be harmonized 

for the benefit of retail investors. SEC Staff Study on Investment Advisers and BrokerDealers As Required By Section 913 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (2011), (Washington, D.C. January, 2011).
 

Page 21 GAO-13-75 Lifetime Withdrawal Products

• FINRA Rule 2090, which requires broker-dealers to ask about and 

retain essential information on each customer (“Know Your 

Customer”) and concerning the authority of each person acting on 

behalf of the customer.

• FINRA Rule 2111, which requires broker-dealers to have a 

reasonable basis to believe that a recommended securities 

transaction or investment strategy is suitable for the customer based 

on information obtained through reasonable diligence of the brokerdealer or its associated person to ascertain the customer’s investment 

profile. This profile includes, but is not limited to the customer’s other 

investments, financial situation and needs, tax status, investment 

objectives, investment experience, investment time horizon, liquidity 

needs, risk tolerance, and any other information the customer may 

disclose to the broker-dealer or associated person in connection with 

the recommendation.

• National Association of Securities Dealers (NASD) Rule 2210, which 

regulates broker-dealers’ communications with the public and applies 

to, among other things, variable annuity advertisements. Brokerdealers must file retail communications concerning variable annuities 

with FINRA and respond to comments provided by FINRA staff on 

such communications.32

• FINRA Rule 2330, specific to deferred variable annuities, which 

governs member broker-dealers’ compliance and supervisory 

responsibilities with respect to the recommendation of the initial 

purchase or exchange of deferred variable annuities, and initial 

subaccount allocations.

These requirements apply to the recommendation and sale of variable 

annuity products, including those with guaranteed lifetime withdrawal 

benefits. According to SEC officials, issuers of CDAs have been 

registering offerings of their CDA products with SEC, and SEC is 

reviewing the disclosures associated with these products. While we did 

not observe and were not told of any such instances, if CDAs were sold 

without being registered as securities, SEC could take action if it 

 

32FINRA, which formed in 2007, is in the process of converting the older NASD rules into 

its own rule book. Some rules have not yet been converted, and therefore retain the 

NASD label. FINRA rule 2210 replaces NASD Rule 2210 effective February 4, 2013.
 

Page 22 GAO-13-75 Lifetime Withdrawal Products

determined that securities laws were being violated. If it were determined 

that federal securities laws did not apply to CDA offerings, relevant state 

regulations would still apply. In addition, FINRA officials said that they 

regulate member broker-dealers that offer variable annuity products, 

including variable annuities with GLWB riders. If a broker-dealer offers a 

CDA that is registered under the federal securities laws, FINRA also 

regulates the sale of such a CDA. If state insurance law issues arise in 

connection with a firm’s sale of a CDA, FINRA staff may refer these 

issues to relevant state insurance regulators.

The NAIC committee responsible for life insurance and annuities issues

considers CDAs to be insurance products and has developed annuity 

disclosure and suitability model regulations for use by state insurance 

regulators. NAIC has developed these model disclosure and suitability 

regulations for annuity products in collaboration with consumer advocates

and industry experts. However, unlike federal standards that are 

consistently applied to variable annuities regardless of where consumers 

live, state adoption of these model regulations varies, so protections may 

be stronger in some states than in others. In 2011, NAIC developed a 

model disclosure regulation for annuity products that serves several 

functions for consumers and insurers, including:

• helping ensure that consumers understand annuity products by 

explaining basic features, benefits, and fees;

• suggesting that annuity products with guaranteed income or benefit 

provisions are intended to be longer-term investment products;

• providing guidance for insurers when they choose to develop product 

illustrations intended to help consumers better understand how a 

particular annuity product works. In particular, the guidance provides 

illustration formats and specifies what kinds of illustration disclosures 

must be made when an insurer chooses to develop them; and

• requiring that annuity customers be provided or referred to NAIC’s 

Annuity Buyer’s Guide that also contains general product information 

and provides answers to basic questions about risks and investing 

that consumers can use to decide whether these products are right for 

them.

NAIC Has Developed 

Annuity Disclosure and 

Suitability Regulations, but 

State Adoption and 

Protection Levels Vary
 

Page 23 GAO-13-75 Lifetime Withdrawal Products

In addition to its model disclosure regulation, NAIC developed a model 

suitability regulation in 2003 to help ensure that insurers consider the 

financial needs and objectives of consumers and that these needs are 

appropriately addressed at the time annuity sales or exchanges occur. 

More specifically, the model suitability regulation requires insurers and 

insurance agents to inquire about consumers’ suitability information and 

ensure that they have reasonable grounds to believe that annuity 

products would benefit consumers before recommending purchases or 

exchanges.33

• be responsible for compliance with the model regulation whether or 

not they contract suitability functions out to a third party;

In 2006, NAIC revised the model regulation to expand its 

scope to consumers of all ages, and in 2010 the model regulation was 

again revised to further strengthen a number of annuity suitability 

protections. Among other changes, the 2010 revision requires insurers to

• maintain procedures for reviewing each investment recommendation 

made to consumers and helping ensure that the product is suitable for 

the particular purchaser and that the purchaser understands the 

annuity product recommended; 

• ensure that insurance agents, or producers, complete general annuity 

training before selling annuity products; and

• provide product-specific annuity training and training materials to the 

agent or producer before an agent or producer can solicit the sale of a 

product. 

In addition to these changes, NAIC adopted the revised the model 

regulation to set standards and procedures for suitable annuity 

recommendations and to require insurers to establish a system to 

supervise recommendations so that the insurance needs and financial 

objectives of consumers are appropriately addressed. The revised NAIC 

model regulation includes a “safe harbor” provision that is intended to 

prevent duplicative suitability standards from being applied to sales of 

 

33According to NAIC’s model regulation, suitability information refers to information that is 

reasonably appropriate to determine the suitability of an annuity recommendation for a 

consumer, including the following: age, annual income, financial situation and needs, 

financial experience and objectives, intended use of the annuity, financial time horizon, 

existing assets, liquidity needs, liquid net worth, risk tolerance, and tax status.
 

Page 24 GAO-13-75 Lifetime Withdrawal Products

annuities through FINRA member broker-dealers. Annuity sales made in 

compliance with FINRA requirements are deemed to comply with the 

suitability requirements outlined in NAIC’s model regulation. Violations of 

state law developed from the model regulation can result in remedies for 

consumers and penalties for insurers and agents. Under the model 

regulation, state insurance commissioners can require reasonably 

appropriate corrective action for violations that have harmed consumers.

NAIC information shows that, as of October 2012, state adoption of 

NAIC’s disclosure and suitability regulations varied significantly, meaning 

that consumers in some states may not be protected as well as those in 

other states.34 According to NAIC, many states have adopted some form 

of annuity disclosure regulation, although some states and the District of 

Columbia do not have disclosure protections in place. As of October 

2012, officials are working to determine which states had adopted the 

revised model disclosure regulation.

35

 

34According to NAIC officials, NAIC has not collected nationwide data on which states 

allow the sale of CDA sales, so we were unable to determine which states allow CDA 

sales but have not adopted disclosure and suitability regulations.

In terms of the suitability model 

regulation, 19 states plus the District of Columbia have adopted NAIC’s 

most recent model regulation that incorporates the added protections 

noted above, and another 29 states have adopted other suitability 

protections for annuity consumers. The remaining 2 states do not have 

suitability regulations in place. According to NAIC officials, model 

disclosure and suitability standards are not required as part of NAIC’s 

accreditation program. Figure 2 summarizes the state adoption of 

suitability regulations.

35According to NAIC officials, “other suitability protection” includes but is not limited to 

adopting earlier versions of the NAIC model suitability regulation, or developing legislation 

or regulations derived from other sources such as bulletins and administrative rulings. For 

the purpose of this study, we reviewed NAIC’s model disclosure and suitability regulations, 

but did not review states’ other disclosure or suitability protections.
 

Page 25 GAO-13-75 Lifetime Withdrawal Products

Figure 2: State Adoption of Suitability Regulations as of October 2012

Whether or not states have adopted NAIC disclosure and suitability 

regulation is important for CDA consumers. Unlike federal regulations that 

apply to the sale of VA/GLWBs nationwide, disclosure and suitability 

regulations for CDAs may depend on the actions of individual states and 

the extent to which they have implemented these protections. According 

to NAIC, regulatory action by states can time to occur and depends on 

legislative cycles and the political environment of states. As the 
 

Page 26 GAO-13-75 Lifetime Withdrawal Products

information in figure 2 shows, consumers across states are subject to 

different suitability protection and in some cases to no protection at all.36

The different regulatory approaches among the sample of seven states 

we reviewed also show the variation in regulation of CDAs across states. 

Although most states in our sample have not specifically approved CDA 

sales, most have adopted some form of disclosure and suitability 

regulation for annuity products. Among these seven states, three have 

adopted NAIC’s model disclosure regulation and three have adopted 

NAIC’s most recent suitability regulation. For the states that allow CDA 

sales, the consumer protections found in the model regulations are 

critical. Of the two states that allow CDA sales—Iowa and Ohio—both 

have adopted NAIC’s model disclosure regulation, but only Iowa has 

adopted its most recent model suitability regulation. Ohio, according to 

NAIC information, has passed a previous version of NAIC’s model 

suitability regulation, and therefore has not adopted added protections 

found in the revised model regulation as outlined above. Consumers in 

states that have not adopted NAIC’s model regulations may not be 

benefitting from available disclosure and suitability protections. More 

specifically, states that have not adopted the most recent model suitability 

regulations may not be extending to consumers protections developed 

through NAIC’s 2010 suitability revision. Table 1 shows the variation in 

the disclosure and suitability protections across our seven sample states.

 

36In prior work that was designed to provide insights for the development of a federal 

financial services regulatory framework, we highlighted the importance of, among other 

things, providing consistent consumer protections for similar financial products and 

services. See GAO, Financial Regulation: A Framework for Crafting and Assessing 

Proposals to Modernize the Outdated U.S. Financial Regulatory System, GAO-09-216 

(Washington, D.C.: Jan. 8, 2009). In a report looking at regulation of the insurance 

industry, a function carried out by the states, we pointed out the importance of state 

regulation supporting the goals of this framework. See GAO, Insurance Reciprocity and 

Uniformity: NAIC and State Regulators Have Made Progress in Producer Licensing, 

Product Approval, and Market Conduct Regulation, but Challenges Remain, GAO-09-372 

(Washington, D.C.: Apr. 6, 2009). 
 

Page 27 GAO-13-75 Lifetime Withdrawal Products

Table 1: CDA Consumer Regulations in Sample States, as of October 2012

Sample 

state

CDA sales 

approved

Model 

disclosure 

regulation 

adopted

Other 

disclosure 

protection 

adopted

Most recent 

model 

suitability 

regulation 

adopted

Other 

suitability 

protection 

adopted

California X 

Florida X X 

Iowa X X X 

New Jersey X 

New York X 

Ohio X X X 

Utaha X X 

Sources: GAO and NAIC.

Note: According to NAIC, “other disclosure protection” and “other suitability protection” used in this 

table include but are not limited to adopting earlier versions of the NAIC model regulation, or 

legislation or regulation derived from other sources such as bulletins and administrative rulings. 

a

State insurance officials with whom we spoke from Utah were unsure whether CDAs had been sold 

there because Utah is a “file and use” state that does not require state review of insurance products 

before they are sold. However, Utah officials said that they did not believe that CDAs were being sold 

in their state. 

Some industry participants suggest state insurance regulation and 

existing actuarial guidance may adequately address risks to insurers 

offering CDAs and to consumers. Others said that CDAs may pose 

solvency risks for both because insurers offer consumers an income 

guarantee but do not maintain the assets on which the guarantees are 

made. One major insurer has said that CDAs pose significant enough 

pricing and reserving challenges that it does not offer CDAs. In addition, 

two consumer advocates with whom we spoke highlighted the solvency 

risks CDAs pose for insurers. One advocate suggested that reasonable 

and appropriate insurer reserving and capital requirements do not 

currently exist for CDAs and that considerable NAIC and state regulatory 

work would be needed to develop them. The same advocate said selling 

CDA products before key issues concerning the regulatory framework are 

finalized might expose consumers to risks that might result from an 

insurer’s potential insolvency. The advocate concluded that the potential 

for insurers to increase the marketing and sale of CDAs, given the 

growing needs of retirees, makes having consumer and insurer 

protections in place important.

Regulatory Uncertainty 

and Concerns about CDA 

Regulation Have Prompted 

Industry Oversight 

Reviews
 

Page 28 GAO-13-75 Lifetime Withdrawal Products

Potential risks to CDA consumers and insurers have prompted industry 

oversight reviews of these products and their regulation. Although NAIC 

has determined that CDAs are a life insurance product, it is working with 

state regulators, insurers, and consumer advocates through its CDA 

Working Group, formed in March 2012, to build greater consensus around 

the classification of CDAs and to determine whether any adjustments to 

state regulation might be appropriate. In particular, NAIC is evaluating the 

adequacy of existing state annuity laws and regulations for CDA sales, 

including those on insurer solvency such as capital adequacy and reserve 

requirements. According to NAIC officials, both NAIC and state insurance 

regulators recognize the complexity of CDA products for consumers and 

are also working to revise disclosure and suitability practices where 

appropriate.

Another industry review by the NOHLGA, NAIC, and state insurance 

regulators aims to address whether CDA consumers are protected by 

state insurance guaranty funds in the event of an insurer’s insolvency. 

According to NOLHGA officials, variable annuities are not covered by 

guaranty funds because they are indistinguishable from equity 

products. That is, they are not supported by assets in an insurer’s general 

account, but by specific assets in separate accounts dedicated to the 

particular fund or funds chosen for the variable annuity. However, the 

officials said that guaranteed lifetime withdrawal benefits, which are now 

part of most variable annuity contracts, are distinct from the equity portion 

of a variable annuity and are generally covered by state guaranty 

funds. The officials said that while CDAs would also appear to have an 

equity portion and a guarantee portion, they have a committee studying 

the extent to which CDAs might be covered by state guaranty 

funds. Officials noted that even when the committee has reached a 

determination on guaranty fund protections, each state will have to reach 

its own conclusion about whether their particular guaranty fund laws allow 

for CDA coverage.
 

Page 29 GAO-13-75 Lifetime Withdrawal Products 

We provided a draft of the report to SEC and NAIC and relevant excerpts 

to FINRA. Each provided technical comments that were incorporated as 

appropriate. 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Chairman of the 

Securities and Exchange Commission, the Chief Executive Officer of the 

National Association of Insurance Commissioners, and other interested 

parties. In addition, the report will be available at no charge on the GAO 

website at http://www.gao.gov.If you or your staff have any questions 

about this report, please contact Alicia Puente Cackley (202) 512-8678 or 

cackleya@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

GAO staff who made major contributions to this report are listed in 

appendix III. 

Alicia Puente Cackley 

Director 

Financial Markets 

 and Community Investment 

Agency Comments 
Appendix I: Objectives, Scope, and 

Methodology

Page 30 GAO-13-75 Lifetime Withdrawal Products

To compare the features of variable annuities with guaranteed lifetime 

withdrawal benefits (VA/GLWB) and contingent deferred annuities (CDA), 

we analyzed specific insurance company products to obtain information 

on how the products function, including how investment gains and losses 

are treated, how withdrawal amounts are determined, and what happens 

when a consumer’s investment account is depleted. We also interviewed 

insurance company officials to verify our understanding of their products, 

and VA/GLWBs and CDAs in general. We judgmentally selected the 

companies based on criteria that included their market share of variable 

annuity sales and their decisions to sell or not to sell CDAs. To identify 

potential benefits and risks to consumers, we analyzed the product 

information we obtained and also interviewed insurers, consumer 

advocates, and state insurance regulators. To understand the potential 

risks these products pose to insurers and how they manage these risks, 

we also interviewed NAIC officials and reviewed information from insurers 

and stakeholder groups. We also obtained data from industry 

organizations on the sale of annuity products with guaranteed lifetime 

withdrawals. We discussed the sources and reliability of the data with 

officials from these organizations and found the data sufficiently reliable 

for the purposes of this report.

To determine how VA/GLWBs and CDAs are regulated and the extent to 

which regulation addresses identified concerns, we identified regulations

and processes used by federal and state regulators, as well as any 

proposed regulations, and compared them with the risks to consumers 

that we identified as part of the work under the previous objective. Our 

review of state regulation included model laws developed by the National 

Association of Insurance Commissioners (NAIC), specific state 

regulations, and Securities and Exchange Commission (SEC) and 

Financial Industry Regulatory Authority (FINRA) rules. We selected the 

sample of states for our analysis based on the volume of sales of 

VA/GLWBs and CDAs in the state, whether the state allowed the sale of 

CDAs, and the state’s population. We interviewed NAIC, state, SEC, and 

FINRA officials to determine how VA/GLWBs and CDAs are regulated. 

We also interviewed other stakeholder groups, such as consumer 

advocates and industry organizations, to gain their perspective on issues 

related to regulation of lifetime income products considered in our review.

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 31 GAO-13-75 Lifetime Withdrawal Products

We conducted this performance audit from February 2012 to November 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Alicia Puente Cackley, 202-512-8678 or cackleya@gao.gov

In addition to the contact named above, Patrick A. Ward (Assistant 

Director), Emily R. Chalmers, Nima Patel Edwards, Scott E. McNulty, and 

Steve Ruszczyk made key contributions to this report. Also contributing to 

this report were Pamela Davidson, Marc Molino, Patricia Moye, and 

Frank Todisco.

Appendix II: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments

(250666)
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