Wednesday, July 14, 2010

Inside Baseball: Rule 151A

There are basically three varieties of life insurance and annuity products: fixed, variable and indexed. Fixed products are those in which the insurer decides (based on a number of factors) what interest rate to credit its policies; these plans include a guaranteed minimum interest rate, and are regulated by the states. Variable products leave the rate of return to the owner, through the use of sub-accounts that look (and act) very much like mutual funds. The sub-accounts don't have a minimum interest guarantee, and the plans are regulated by both the states and the Fed's (and require special, additional licensing).

The third type is called "indexed," and is somewhat of a hybrid between the other two: indexed plans credit interest based on the behavior of the stock market, but also include minimum guarantees. They are not as flexible as the variable type, in that the insured has no direct control over the interest rate. How, and by whom, these plans are regulated has been the subject of much debate. As part of the on-going financial services "reform" efforts in DC, it looked like indexed annuities would come under the jurisdiction of the Fed's by way of the so-called Rule 151A.

Today's email brings news from a variety of sources that this rule has been "vacated," meaning that these plans will continue (for the time being, at least) to be regulated at the state level.

So what does this mean, exactly?

Well, for one thing, it means less paperwork (compliance) for agents, and agents won't necessarily have to be dual licensed" (that is, by both the state and the Fed's). It also means that these plans will continue to be covered by states' Guarantee Funds. That's the good news (or bad, depending on one's perspective).

I'm not convinced that this is necessarily a "good thing." On the one hand, I am enthusiastically in favor of keeping things simple, and in regulating insurance at the state level. But I'm also rather ambivalent about these products: it seems to me that they are complicated enough to require someone with expertise in a variety of investment areas, which would necessarily rule out a lot of us "regular" (non-SEC-licensed) agents. It's not that they're "bad" products, just not as easily understood (on either side of the desk) as fixed ones.

[ed: Please don't lambast me that Indexed Plans are also "fixed;" they are different animals]

It will be interesting to see if the SEC continues to push this.
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