Annuities by State

Insurance products, including annuities, are primarily regulated by each state’s insurance commissioner, which can lead to differences between states. Most states coordinate to provide some uniform standards for insurance companies to abide by. However, a variety of factors may impact the rules surrounding annuities by state, including the size of the insurance market, existing consumer protections and taxes.

Consumers should educate themselves about their own home state’s regulations before buying any insurance product. Along with this state-specific annuity guide, state insurance commissioners produce public information about relevant rule changes, state guarantee limits and consumer notices. To find this information online, look up your state’s Department of Insurance or navigate to your state on the National Association of Insurance Commissioners website (NAIC.org).

State annuity regulations, while governed individually by each Insurance Commissioner, have created a level of nationwide uniformity through commonly adopted rules and certain federal regulations. Outside of these agreed-upon rules, the states are responsible for monitoring and overseeing all licensed individuals and businesses within their state.

One of the most important protections states provide is the regulation of the financial stability of its insurance carriers. Each state has robust procedures for monitoring and addressing financial instability. Ideally, routine annual compliance reporting will discover an insurance carrier’s financial issues early.

However, in the event that an insurance carrier fails to cover its obligations, each state has a Guaranty Association designed to cover a certain amount of each contract. Consumers are guaranteed the expected value of their contract or the state guarantee limit, whichever is less.

The National Association of Insurance Commissioners (NAIC) has established standards of care that document the basis for recommendations and ensure compliance with consumer protections. These rules require insurance professionals to thoroughly explain product details, share conflicts of interest and demonstrate a duty of recommending solutions that are in the best interest of the consumer.

As of June 2024, 45 states have adopted these standards, with adoption pending in four additional states. New York State, however, has opted not to adopt these rules, instead establishing its own regulations for annuity transactions.

Passed on April 23, 2024, and effective on September 23, 2024, the Retirement Security Rule redefines when a person is considered a fiduciary financial advisor, requiring them to abide by fiduciary standards when offering guidance and advice to consumers.

The new rule impacts any professional financial, including insurance agents, who work with retirement investors and offer recommendations for a fee or other direct or indirect compensation.

As of June 2024, the courts are facing challenges to this rule, which may lead to changes or amendments to the final regulations, depending on the outcomes of the pending litigation.

Your state’s income tax code significantly affects the variation in annuity taxes on a state-by-state basis. While all annuities are subject to federal taxes, state income taxes vary. Additionally, seven states and Puerto Rico impose additional taxes on certain annuities.

An annuity contract is a product that does not change the tax status of the money contributed to it. Therefore, all rules and requirements that apply to IRA taxation also apply to annuities funded by qualified retirement money. If you funded your annuity contract using money from a Traditional IRA, all income or withdrawals will be taxable as income. If funded with funds from a Roth IRA, income or withdrawals will be tax-free. When an annuity is funded from a non-qualified source, such as a taxable brokerage account, specific rules apply to income and withdrawal taxation. Income from an annuitized contract will be taxable proportionately based on the amount of untaxed growth in the contract.

An unannuitized contract follows a Last In First Out (LIFO) standard. This means that when withdrawing funds, the growth (or gains) accumulated most recently in the contract will be withdrawn first, and all of this growth will be taxable as income. Only after withdrawing all growth can the holder withdraw the original contributions or tax basis, which are not taxable.

Select states and Puerto Rico also place additional taxes on certain annuity contracts, but normally the insurance company itself pays these taxes. Consumers should assume that the company will pass this expense on to them indirectly as part of the commissions paid to the agent and insurance carrier.

Annuity sales continue to grow year over year, and 2024 is off to a similar start. Total annuity sales in 2023 reached $385M, marking the second consecutive year of record highs.

Due in large part to the increase in interest rates and the swell of retirees, annuity sales were up by 23% compared to 2022. One notable exception to the growth story is the category of variable annuities, which posted the lowest sales ever recorded.

In the first quarter of 2024, the upward trends continued. Sales were 21% higher than Q1 of 2023 and only slightly off the amount in Q4 of 2023, which is usually the highest sales period of the year.

There are many state and federal resources for consumers to understand the available products and state annuity regulations of their home state.

The NAIC has the most comprehensive data on all state insurance departments. You can search for your specific state or review all the state directory information.

NOLHGA membership includes all 50 states and the District of Columbia and supports the guaranty associations underpinning the insurance markets of each state. Guaranty associations step in to cover the benefits owed to consumers when an insurance company fails. Each state has its own laws and limits on the amounts that qualify, which you can research specific to your state.

Annuities that involve marketable securities, such as Variable Annuities and Structured Annuities (otherwise known as Registered Index Linked Annuities), are also regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). Both organizations produce educational materials and consumer notices to keep investors informed about rules and regulatory actions.

The regulation and sale of annuities is based on your home state. You will need to work with an agent and insurance carrier licensed to work in your state, which may include both national and regional carriers.

One of the major differences between states is the free look period. A free look period is the length of time a buyer can cancel an annuity without penalty after purchase. This allows consumers a chance to review the contract and make a final decision without pressure. Free look periods vary by state but typically last between 10 and 30 days.

State guaranty association protections also differ by state. Most states offer guarantees that range from $250,000 to $500,000. Before purchasing any contract, check the limits of your state guarantees and the financial stability of the insurance carrier.

If you’re unsure about the type of product or service you need, it can be beneficial to speak with a professional financial advisor about your current situation and income needs.

Due to the significant differences in sales trends and regulatory frameworks across states, being well-informed about your state’s specific rules and regulations is important for making informed decisions that best suit your and your family’s needs. Utilize resources provided by NAIC or NOLHGA, or consult with a trusted financial advisor who can offer comprehensive guidance on integrating annuities into your financial strategy. Advisors familiar with your state’s regulations can expertly navigate available products to ensure a tailored approach.