New Mexico Administrative Code › Title 13 - INSURANCE › Chapter 9 - LIFE INSURANCE AND ANNUITIES › Part 12 - ANNUITY AND DEPOSIT FUND DISCLOSURE › Section 13.9.12.12 - BUYER'S GUIDE TO FIXED DEFERRED ANNUITIES

Current through Register Vol. 35, No. 13, July 16, 2024
[The face page of the fixed deferred annuity buyer's guide
				  shall read as follows:]
Prepared by the National Association of Insurance
				  Commissioners
The National Association of Insurance Commissioners is an
				  association of state insurance regulatory officials. This association helps the
				  various insurance departments to coordinate insurance laws for the benefit of
				  all consumers.
This guide does not endorse any company or policy.
Reprinted by. . .
It is important that you understand the differences among
				  various annuities so you can choose the kind that best fits your needs. This
				  guide focuses on
fixed deferred
annuity contracts. There is,
				  however, a brief description of variable annuities. If you're thinking of
				  buying an equity-indexed annuity, an appendix to this guide will give you
				  specific information. This guide isn't meant to offer legal, financial or tax
				  advice. You may want to consult independent advisors. At the end of this guide
				  are questions you should ask your agent or the company. Make sure you're
				  satisfied with the answers before you buy.
WHAT IS AN ANNUITY?
An annuity is a contract in which an insurance company makes
				  a series of income payments at regular intervals in return for a premium or
				  premiums you have paid. Annuities are most often bought for future retirement
				  income. Only an annuity can pay an income that can be guaranteed to last as
				  long as you live.
An annuity is neither a life insurance nor a health insurance
				  policy. It's not a savings account or a savings certificate. You shouldn't buy
				  an annuity to reach short-term financial goals.
Your value in an annuity contract is the premiums you've
				  paid, less any applicable charges, plus interest credited. The insurance
				  company uses the value to figure the amount of most of the benefits that you
				  can choose to receive from an annuity contract. This guide explains how
				  interest is credited as well as some typical charges and benefits of annuity
				  contracts.
A
deferred
annuity has two parts or
periods
. During the
accumulation period
, the
				  money you put into the annuity, less any applicable charges, earns interest.
				  The earnings grow tax-deferred as long as you leave them in the annuity. During
				  the second period, called the
payout period
, the company pays
				  income to you or to someone you choose.
WHAT ARE THE DIFFERENT KINDS OF
				  ANNUITIES?
This guide explains major differences in different kinds of
				  annuities to help you understand how each might meet your needs. But look at
				  the specific terms of an individual contract you're considering and the
				  disclosure document you receive. If your annuity is being used to fund or
				  provide benefits under a pension plan the benefits you get will depend on the
				  terms of the plan. Contact your pension plan administrator for
				  information.
This buyer's guide will focus on individual fixed deferred
				  annuities.
Single Premium or Multiple
				  Premium
You pay the insurance company only one payment for a single
				  premium annuity. You make a series of payments for a multiple premium annuity.
				  There are two kinds of multiple premium annuities. One kind is a flexible
				  premium contract. Within set limits, you pay as much premium as you want,
				  whenever you want. In the other kind, a scheduled premium annuity, the contract
				  spells out your payments and how often you'll make them.
Immediate or Deferred
With an
immediate
annuity, income payments
				  start no later than one year after you pay the premium. You usually pay for an
				  immediate annuity with one payment.
The income payments from a
deferred
annuity
				  often start many years later. Deferred annuities have an accumulation period,
				  which is the time between when you start paying premiums and when income
				  payments start.
Fixed or Variable
* Fixed
During the accumulation period of a
fixed
				  deferred
annuity, your money (less any applicable charges) earns
				  interest at rates set by the insurance company or in a way spelled out in the
				  annuity contract. The company guarantees that it will pay no less than a
				  minimum rate of interest. During the payout period, the amount of each income
				  payment to you is generally set when the payments start and will not
				  change.
* Variable
During the accumulation period of a
variable
annuity the insurance company puts your premiums (less any applicable charges)
				  into a separate account. You decide how the company will invest those premiums,
				  depending on how much risk you want to take. You may put your premium into a
				  stock, bond or other account, with no guarantees, or into a fixed account, with
				  a minimum guaranteed interest. During the payout period of a variable annuity,
				  the amount of each income payment to you may be fixed (set at the beginning) or
				  variable (changing with the value of the investments in the separate
				  account).
HOW ARE THE INTEREST RATES SET FOR MY FIXED DEFERRED
				  ANNUITY?
During the accumulation period, your money (less any
				  applicable charges) earns interest at rates that change from time to time.
				  Usually, what these rates will be is entirely up to the insurance
				  company.
Current Interest Rate
The current rate is the rate the company decides to credit to
				  your contract at a particular time. The company will guarantee it will not
				  change for some time period.
* The
initial rate
is an interest rate the
				  insurance company may credit for a set period of time after you first buy your
				  annuity. The initial rate in some contracts may be higher than it will be
				  later. This is often called a bonus rate.
* The
renewal rate
is the rate credited by
				  the company after the end of the set time period. The contract tells how the
				  company will set the renewal rate, which may be tied to an external reference
				  or index.
Minimum Guaranteed Rate
The
minimum guaranteed interest
rate is the
				  lowest rate your annuity will earn. This rate is stated in the contract.
Multiple Interest Rates
Some annuity contracts apply different interest rates to each
				  premium you pay or to premiums you pay during different time periods.
Other annuity contracts may have two or more accumulated
				  values that fund different benefit options. These accumulated values may use
				  different interest rates.
You get only one of the accumulated values
				  depending on which benefit you choose.
WHAT CHARGES MAY BE SUBTRACTED FROM MY FIXED DEFERRED
				  ANNUITY?
Most annuities have charges related to the cost of selling or
				  servicing it. These charges may be subtracted directly from the contract value.
				  Ask your agent or the company to describe the charges that apply to your
				  annuity. Some examples of charges, fees and taxes are:
Surrender or Withdrawal
				  Charges
If you need access to your money, you may be able to take all
				  or part of the value out of your annuity at any time during the accumulation
				  period. If you take out part of the value, you may pay a
withdrawal
charge. If you take out all of the value and surrender, or terminate,
				  the annuity, you may pay a
surrender
charge. In either case,
				  the company may figure the charge as a percentage of the value of the contract,
				  of the premiums you've paid or of the amount you're withdrawing. The company
				  may reduce or even eliminate the surrender charge after you've had the contract
				  for a stated number of years. A company may waive the surrender charge when it
				  pays a death benefit.
Some annuities have stated terms. When the term is up, the
				  contract may automatically expire or renew. You're usually given a short period
				  of time, called a
window
, to decide if you want to renew or
				  surrender the annuity. If you surrender during the window, you won't have to
				  pay surrender charges. If you renew, the surrender or withdrawal charges may
				  start over.
In some annuities, there is no charge if you surrender your
				  contract when the company's current interest rate falls below a certain level.
				  This may be called a
bail-out
option.
In a multiple-premium annuity, the surrender charge may apply
				  to each premium paid for a certain period of time. This may be called a
rolling
surrender or withdrawal charge.
Some annuity contracts have a
market value
				  adjustment
feature. If interest rates are different when you surrender
				  your annuity than when you bought it, a market value adjustment may make the
				  cash surrender value higher or lower. Since you and the insurance company share
				  this risk, an annuity with a MVA feature may credit a higher rate than an
				  annuity without that feature.
Be sure to read the Tax Treatment section and ask your tax
				  advisor for information about possible tax penalties on withdrawals.
Free Withdrawal
Your annuity may have a limited
free
				  withdrawal
feature. That lets you make one or more withdrawals without
				  a charge. The size of the free withdrawal is often limited to a set percentage
				  of your contract value. If you make a larger withdrawal, you may pay withdrawal
				  charges. You may lose any interest above the minimum guaranteed rate on the
				  amount withdrawn. Some annuities waive withdrawal charges in certain
				  situations, such as death, confinement in a nursing home or terminal
				  illness.
Contract Fee
A contract fee is a flat dollar amount charged either once or
				  annually.
Transaction Fee
A transaction fee is a charge per premium payment or other
				  transaction.
Percentage of Premium
				  Charge
A percentage of premium charge is a charge deducted from each
				  premium paid. The percentage may be lower after the contract has been in force
				  for a certain number of years or after total premiums paid have reached a
				  certain amount.
Premium Tax
Some states charge a tax on annuities. The insurance company
				  pays this tax to the state. The company may subtract the amount of the tax when
				  you pay your premium, when you withdraw your contract value, when you start to
				  receive income payments or when it pays a death benefit to your
				  beneficiary.
WHAT ARE SOME FIXED DEFERRED ANNUITY CONTRACT
				  BENEFITS?
Annuity Income Payments
One of the most important benefits of deferred annuities is
				  your ability to use the value built up during the accumulation period to give
				  you a lump sum payment or to make income payments during the payout period.
				  Income payments are usually made monthly but you may choose to receive them
				  less often. The size of income payments is based on the accumulated value in
				  your annuity and the annuity's
benefit rate
in effect when
				  income payments start. The benefit rate usually depends on your age and sex,
				  and the annuity payment option you choose. For example, you might choose
				  payments that continue as long as you live, as long as your spouse lives or for
				  a set number of years.
There is a table of guaranteed benefit rates in each annuity
				  contract. Most companies have current benefit rates as well. The company can
				  change the current rates at any time, but the current rates can never be less
				  than the guaranteed benefit rates. When income payments start, the insurance
				  company generally uses the benefit rate in effect at that time to figure the
				  amount of your income payment.
Companies may offer various income payment options. You (the
				  owner) or another person that you name may choose the option. The options are
				  described here as if the payments are made to you.
* Life Only - The company pays income for your lifetime. It
				  doesn't make any payments to anyone after you die. This payment option usually
				  pays the highest income possible. You might choose it if you have no
				  dependents, if you have taken care of them through other means or if the
				  dependents have enough income of their own.
* Life Annuity with Period Certain - The company pays income
				  for as long as you live and guarantees to make payments for a set number of
				  years even if you die. This
period certain
is usually 10 or 20
				  years. If you live longer than the period certain, you'll continue to receive
				  payments until you die. If you die during the period certain, your beneficiary
				  gets regular payments for the rest of that period. If you die after the period
				  certain, your beneficiary doesn't receive any payments from your annuity.
				  Because the "period certain" is an added benefit, each income payment will be
				  smaller than in a life-only option.
* Joint and Survivor - The company pays income as long as
				  either you or your beneficiary lives. You may choose to decrease the amount of
				  the payments after the first death. You may also be able to choose to have
				  payments continue for a set length of time. Because the
survivor
feature is an added benefit, each income payment is
				  smaller than in a life-only option.
Death Benefit
In some annuity contracts, the company may pay a death
				  benefit to your beneficiary if you die before the income payments start. The
				  most common death benefit is the contract value or the premiums paid, whichever
				  is more.
CAN MY ANNUITY'S VALUE BE DIFFERENT DEPENDING ON MY
				  CHOICE OF BENEFIT?
While all deferred annuities offer a choice of benefits, some
				  use different accumulated values to pay different benefits. For example, an
				  annuity may use one value if annuity payments are for retirement benefits and a
				  different value if the annuity is surrendered. As another example, an annuity
				  may use one value for long-term care benefits and a different value if the
				  annuity is surrendered. You can't receive more than one benefit at the same
				  time.
WHAT ABOUT THE TAX TREATMENT OF
				  ANNUITIES?
Below is a general discussion about taxes and annuities. You
				  should consult a professional tax advisor to discuss your individual tax
				  situation.
Under current federal law, annuities receive special tax
				  treatment. Income tax on annuities is deferred, which means you aren't taxed on
				  the interest your money earns while it stays in the annuity. Tax-deferred
				  accumulation isn't the same as tax-free accumulation. An advantage of tax
				  deferral is that the tax bracket you're in when you receive annuity income
				  payments may be lower than the one you're in during the accumulation period.
				  You'll also be earning interest on the amount you would have paid in taxes
				  during the accumulation period. Most states' tax laws on annuities follow the
				  federal law.
Part of the payments you receive from an annuity will be
				  considered as a return of the premium you've paid. You won't have to pay taxes
				  on that part. Another part of the payments is considered interest you've
				  earned. You must pay taxes on the part that is considered interest when you
				  withdraw the money. You may also have to pay a 10% tax penalty if you withdraw
				  the accumulation before age 59 1/2. The Internal Revenue Code also has rules
				  about distributions after the death of a contract holder.
Annuities used to fund certain employee pension benefit plans
				  (those under Internal Revenue Code Sections 401(a), 401(k), 403(b), 457 or 414)
				  defer taxes on plan contributions as well as on interest or investment income.
				  Within the limits set by the law, you can use pretax dollars to make payments
				  to the annuity. When you take money out, it will be taxed.
You can also use annuities to fund traditional and Roth IRAs
				  under Internal Revenue Code Section 408. If you buy an annuity to fund an IRA,
				  you'll receive a disclosure statement describing the tax treatment.
WHAT IS A "FREE LOOK" PROVISION?
Many states have laws which give you a set number of days to
				  look at the annuity contract after you buy it. If you decide during that time
				  that you don't want the annuity, you can return the contract and get all your
				  money back. This is often referred to as a
free look
or
right to return
period. The free look period should be
				  prominently stated in your contract. Be sure to read your contract carefully
				  during the free look period.
HOW DO I KNOW IF A FIXED DEFERRED ANNUITY IS RIGHT FOR
				  ME?
The questions listed below may help you decide which type of
				  annuity, if any, meets your retirement planning and financial needs. You should
				  think about what your goals are for the money you may put into the annuity. You
				  need to think about how much risk you're willing to take with the money. Ask
				  yourself:
* How much retirement income will I need in addition to what
				  I will get from Social Security and my pension?
* Will I need that additional income only for myself or for
				  myself and someone else?
* How long can I leave my money in the annuity?
* When will I need income payments?
* Does the annuity let me get money when I need it?
* Do I want a fixed annuity with a guaranteed interest rate
				  and little or no risk of losing the principal?
* Do I want a variable annuity with the potential for higher
				  earnings that aren't guaranteed and the possibility that I may risk losing
				  principal?
* Or, am I somewhere in between and willing to take some
				  risks with an equity-indexed annuity?
WHAT QUESTIONS SHOULD I ASK MY AGENT OR THE
				  COMPANY?
* Is this a single premium or multiple premium
				  contract?
* Is this an equity-indexed annuity?
* What is the initial interest rate and how long is it
				  guaranteed?
* Does the initial rate include a bonus rate and how much is
				  the bonus?
* What is the guaranteed minimum interest rate?
* What renewal rate is the company crediting on annuity
				  contracts of the same type that were issued last year?
* Are there withdrawal or surrender charges or penalties if I
				  want to end my contract early and take out all of my money? How much are
				  they?
* Can I get a partial withdrawal without paying surrender or
				  other charges or losing interest?
* Does my annuity waive withdrawal charges for reasons such
				  as death, confinement in a nursing home or terminal illness?
* Is there a market value adjustment (MVA) provision in my
				  annuity?
* What other charges, if any, may be deducted from my premium
				  or contract value?
* If I pick a shorter or longer payout period or surrender
				  the annuity, will the accumulated value or the way interest is credited
				  change?
* Is there a death benefit? How is it set? Can it
				  change?
* What income payment options can I choose? Once I choose a
				  payment option, can I change it?
FINAL POINTS TO CONSIDER
Before you decide to buy an annuity, you should review the
				  contract. Terms and conditions of each annuity contract will vary.
Ask yourself if, depending on your needs or age, this annuity
				  is right for you. Taking money out of an annuity may mean you must pay taxes.
				  Also, while it's sometimes possible to transfer the value of an older annuity
				  into a new annuity, the new annuity may have a new schedule of charges that
				  could mean new expenses you must pay directly or indirectly.
You should understand the long-term nature of your purchase.
				  Be sure you plan to keep an annuity long enough so that the charges don't take
				  too much of the money you put in. Be sure you understand the effect of all
				  charges.
If you're buying an annuity to fund an IRA or other
				  tax-deferred retirement program, be sure that you're eligible. Also, ask if
				  there are any restrictions connected with the program.
Remember that the quality of service that you can expect from
				  the company and the agent is a very important factor in your decision.
When you receive your annuity contract,
READ IT
				  CAREFULLY!!
Ask the agent and company for an explanation of anything you
				  don't understand. Do this
before
any free look period
				  ends.
Compare information for similar contracts from several
				  companies. Comparing products may help you make a better decision.
If you have a specific question or can't get answers you need
				  from the agent or company, contact your state insurance
				  department.