Pop quiz: What life insurance or annuity product has recently been alternatively classified by the states as a fixed annuity, variable annuity, financial guaranty insurance, and a derivative? If you answered “contingent annuity,” you are one of a minority of advisors who has heard of them and understands state regulators’ confusion about how the products should be classified.

Contingent annuities, often portrayed as “group annuities,” are a standalone guaranteed lifetime withdrawal benefit (GLWB) contract that is offered to mutual fund investors. Under a contingent annuity, the investor pays a fee equal to a percentage of the account value. The contract covers only investments that meet the insurer’s criteria. At a set age, the investor may begin making “systematic withdrawals” equal to a particular percentage of account value. The size of the withdrawals depends on the gender and age of the investor. In the event that the covered account’s value is exhausted, the contingent annuity will kick in and the investor will continue to receive payments in the same amount as the systematic withdrawals until he dies.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of annuities in Advisor’s Journal, see Annuities and Inflation Risk (CC 11-172).

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