In its most simple form, an annuity can be thought of as the opposite of life insurance. In a basic life insurance contract, a person pays an insurer a small sum for many years, and then upon the insured's death, a large payment is made to a beneficiary. In the simplest form of annuity, a large sum is paid to the insurer and then a smaller sum is paid out to the insured over his or her lifetime. More formally, an annuity can be defined as "a contract that provides an income for a specified period of time, such as a number of years, or for life." As with life insurance, annuities can be more complex, with insurers offering a wide variety of both insurance and investment features in the annuity contracts that they sell. Annuities can be classified as follows: Immediate versus Deferred —Under an immediate annuity, an individual pays an insurance company a sum of money and the insurance company begins making regular monthly payments to the individual immediately. Under a deferred annuity, an individual pays the insurance company a sum of money and the insurance company begins making regular monthly payments at some designated time after purchase. For example, an individual at age 45 might buy a 20-year deferred annuity that would start making monthly payments when the individual reaches age 65. Deferred annuities may also be funded over time, with a person making periodic payments into the annuity, as they might with a 401(k) account or other savings vehicle. After this "accumulation phase" is finished, the annuity would then make periodic payments based on the value of the final contributed amount. Fixed versus Variable —A fixed annuity pays a flat monthly amount for the life of the annuitant whereas a variable annuity pays a monthly payment amount tied to the performance of an investment portfolio containing assets such as corporate stocks or bonds. Under a variable annuity, the annuitant bears the risk that the monthly annuity payment could go down. Level Payment versus Graded Payment —In a level payment annuity, the monthly payments remain the same, whereas in a graded annuity the monthly payments increase each year. Depending on the terms of the annuity contract, the payments may increase at a specified rate, such as 2% per year, or may increase at the rate of inflation. Single-Life versus Joint-and-Survivor —A single-life annuity makes regular monthly payments for the life of one person. A joint-and-survivor annuity makes regular monthly payments for the lives of two people, the primary annuitant and a secondary annuitant, typically the spouse of the primary annuitant. Annuities as a class are a wide-ranging financial product: some annuities are relatively simple products designed to pay a set amount per month; some are complex products that may base payments on a variety of other investments combined with different forms of financial guarantees. Indexed annuities are a relatively recent invention combining elements of fixed annuities, which offer returns based on a fixed interest rate, and variable annuities, which offer returns through investment holdings chosen by the annuitant. Indexed annuities have tended to be complex products with features that sometimes may be difficult to value. Specifically, a common form of indexed annuity offers an investment return based on the level of a specific securities index combined with a guaranteed minimum return should the securities market fall, limiting the downside risk to the purchaser. Unlike variable annuities in which the actual securities investments are held in segregated accounts, indexed annuities credit the annuity holder with a return based on a securities index, but the actual securities may or may not be held by the insurance company. The indexed annuity investment return typically does not include dividends that would have accrued had this amount been actually invested in the particular securities index. In addition, there are often insurance options, such as some death benefit upon the death of the annuitant, or a survivor benefit to base payment on the death of the second person in a couple rather than on one person. The various options available in indexed annuities, or other annuities, are often paid for through charges based on a percentage of the account value. There are also typically significant surrender charges should a purchaser wish to cancel the annuity contract early. Annuities in general have been somewhat controversial, with opinions varying widely as to their suitability for many investors. Complaints about annuities include high fees on the investment funds, a lack of liquidity due to high surrender charges, and deceptive sales practices, particularly with regard to sales to senior citizens. These complaints, it should be noted, are not limited to indexed annuities, but include the variable annuity products that have been regarded as securities products under the Securities and Exchange Commission (SEC) regulation for decades. Defenders of annuity products point out that annuities can play an important role in retirement planning. They offer tax-deferred growth for investments and are the only product that can offer a lifetime guaranteed income. One of the primary advantages of annuities compared to other financial products, such as mutual funds or certificates of deposit, is the deferral of tax on the investment earnings of the annuity contract. These earnings are taxed only when the annuitant actually receives the annuity payments, according to formulas specified in the law and in IRS regulations. Internal Revenue Code Section 72 provides that the taxable income from an annuity contract in a given year is the total amount received under the contract that year less that year's prorated share of the cost of (or investment in) the contract. This allows the investment income to compound tax-free for potentially several years before any tax is due. On the other hand, the tax due on annuity investment income is calculated at ordinary income rates, as with interest from savings accounts and certificates of deposits, rather than at the reduced rates that currently apply to capital gains and dividends. Ordinary income tax rates are as high as 35%, while most long-term capital gains and dividends end up being taxed at 15%, although capital gains rates can be as low as 0%. This potentially higher tax rate for annuity investment income can have a significant impact on the economic rationale prompting a consumer to purchase an annuity, and thus makes the annuity market, and the insurers offering annuities, very sensitive to tax proposals that might change rates on investment income. As insurance products, all annuities are regulated by the individual states following the 1945 McCarran-Ferguson Act, which identifies the states as the primary regulators of insurance. This state oversight generally includes regulation of insurer solvency, regulation of the content of insurance products, and regulation of the market conduct of insurers and those selling insurance products. Annuities, particularly variable annuities, have attracted attention for allegedly abusive sales tactics. States coordinate regulation of insurance through the National Association of Insurance Commissioners (NAIC), which has promulgated model laws and regulations on insurance. In order to be effective, however, NAIC models must be adopted by the individual states, which are free to adopt them "as is" or with modifications. This has led to variation among the states in the precise regulations applied to annuities and other insurance products. Insurance products are primarily regulated at the state level, whereas securities products are generally regulated at the federal level, primarily by the SEC. SEC securities regulation related to annuities is typically less extensive than state insurance regulation. Companies that sell securities to the public are required to register with the SEC, as are brokers and others selling securities. In addition to SEC registration, securities brokers are required to be members of the Financial Industry Regulatory Authority (FINRA), a non-governmental self-regulatory organization for the securities industry. Much of the direct oversight of securities dealers occurs through FINRA rather than through the SEC, though the SEC retains authority over FINRA and may require it to adopt, or not adopt, certain policies or rules. There is little SEC oversight equivalent to state solvency requirements for insurers. Federal securities regulations only apply to those financial products that are considered securities under the federal securities laws. For a number of years after the introduction of the variable annuity, some controversy existed as to whether or not these products are securities. The Supreme Court decided in 1959, however, that variable annuities were to be considered securities under federal law. Following that decision, variable annuities have been generally subject to SEC and FINRA requirements, while other types of annuities are not. Both state and federal regulators have concluded that annuities in general present consumer protection issues and need particular regulatory attention. In proposing Rule 151A, the SEC cited the need to protect investors, particularly older investors, from fraudulent and abusive practices related to the sale of indexed annuities. Annuity sales practices have drawn complaints from consumers and various regulatory actions from state regulators and the SEC/FINRA over many years. The complexity of annuity products can allow unscrupulous sellers to take advantage of unsophisticated buyers, while high commissions on some annuities may give sellers a substantial financial incentive to sell these products. The alleged sales abuses seem to particularly affect older consumers. For example, a joint "Investor Alert" by the SEC, FINRA, and the North American Securities Administrators Association (NASAA) cites variable annuities as one of a number of products that are commonly used to defraud senior citizens. State regulators have also taken particular actions to protect consumers from abuses in annuity products. To help harmonize states' oversight efforts, the NAIC's model laws and regulations include an "Annuities Disclosure Model Regulation" and a "Suitability in Annuity Transactions Model Regulation." The NAIC Model Suitability language requires insurance companies to give objective financial information to potential purchasers, and it requires agents to use a standardized form to determine whether an annuity would be suitable for the potential purchaser.