covered by both the GLWB rider and the contingent annuity. However, the contingent annuity is a stand-alone product offered by the life insurer and normally has a simple fee structure; the GLWB rider is part of a variable annuity contract that covers additional risks and expenses, and has a more elaborate fee and expense structure. The costs of the longevity and market risks, and the margins for potential fluctuations in those costs, must be covered in the pricing of both products. The more simplified fee structure of the contingent annuity provides the only means to cover these costs and margins. The more elaborate fee structure of the variable annuity and GLWB rider must also cover additional risk and expense costs, such as enhanced death benefits and commissions. In addition, for a variable annuity with a GLWB, life insurers can use fees (profits) from the underlying product to fund shortfalls in the GLWB (that is, benefits less fees), whereas life insurers can’t do that with contingent annuities. 8. Consumer Issues
Tax Treatment – In several private letter rulings, the Internal Revenue Service has ruled that for tax purposes, contingent annuities are considered to be annuities (Appendix C).
SEC Treatment – Like GLWBs, contingent annuities are treated as securities under the federal securities laws, specifically the Securities Act of 1933 (Appendix D). This treatment requires insurance companies to, among other things, deliver an SEC prospectus to a purchaser at the point of sale, as well as deliver an updated prospectus annually. Contingent annuities are registered with the SEC except where specific exemptions apply (for instance, the “pension exemption” would apply to Contingent Annuities offered in connection with 401(k) plans).
Nonforfeiture Treatment – Contingent Annuities have some characteristics of single premium immediate annuities (SPIAs) and some features found in many deferred annuities. They are similar to SPIAs in that payout guarantees are set at issue. They are similar to deferred annuities in that they might not begin payout until years after issue. They are dissimilar to deferred annuities because the premiums paid do not accumulate to determine the annuity payout, but rather are in the nature of risk charges for a longevity contingency. Consequently, it is logical to treat contingent annuities similarly to SPIAs, which would exempt them from the Standard Nonforfeiture Law for Individual Deferred Annuities (SNFLIDA) and not require paid-up nonforfeiture benefits. This interpretation is also consistent with the current treatment of GLWBs, to which contingent annuities are inherently similar. Variable annuities are not subject to the SNFLIDA; consequently, laws and regulations are mute on the treatment of GLWBs attached to them. The variable annuity model does not address this either. To clarify this interpretation, an actuarial guideline could be drafted to address contingent annuities directly. Ultimately, the appropriate nonforfeiture requirements for contingent annuities should be recognized in changes that LATF is currently considering for the nonforfeiture law. Additional analysis of contingent annuities with respect to nonforfeiture requirements is outlined in Appendix E.