What the NAIC's 2026 Illustration Crackdown Means for Annuity Shoppers

By Editorial Team

Published May 13, 2026 · Updated May 13, 2026

State regulators have started warning about something most annuity shoppers will never see: indexed annuity illustrations projecting sustained annual returns of 10% to 27%. Numbers that, in some cases, outpace the long-run return of the S&P 500 — on paper.

This piece explains what’s driving those numbers, what the NAIC is doing about it in 2026, and what you should ask before you sign anything.

TL;DR — Five Things to Know Now

1. Regulators have observed FIA illustrations showing annual returns of 10%–27%, driven by proprietary backcasted indexes and a rules gap that lets carriers freeze today’s introductory rates into all future years.

2. The NAIC’s Illustrations Working Group is seeking a short-term fix within a year, with NAIC Model #245 (Annuity Disclosure Model Regulation) as the likely starting point.

3. Model #275 (best interest) means your agent must document why an annuity suits you — and if you’re replacing an existing contract, the new one must demonstrably be better, not just more lucrative for the agent.

4. Regulators plan to use technology to monitor IMO advertising, agent compensation, and projected-vs.-actual performance in near real time — a fundamental shift from the current retrospective model.

5. The Annuity Buyer’s Guide hasn’t been updated since 2013. A major draft revision (March 2026) now covers RILAs, MYGAs, bonuses, surrender charges, and the explicit warning that illustrations are not guarantees.

Why Regulators Are Zooming In Right Now

At the NAIC’s 2026 Spring National Meeting (March 22–25, San Diego), the Life Insurance and Annuities (A) Committee — chaired by Iowa Commissioner Doug Ommen and vice-chaired by Michigan Director Anita G. Fox — made annuity sales practices its headline priority. The committee’s published March 23, 2026 agenda devoted two of its seven action items to illustrations and market scanning, and directed four working groups to advance related work.

The trigger: a regulator-led survey of roughly 25–30 of the largest fixed indexed annuity (FIA) carriers, which found:

• ~⅓ of carriers illustrated annual returns of 10% or less
• ~⅓ showed illustrated returns from 11%–15%
• ~⅓ showed returns mostly in the 16%–25% range — with one carrier illustrating as high as 27% annually

For context, the average long-run annual return of the S&P 500 is roughly 8%–9%. Many FIA illustrations were outpacing not just bonds but the stock market itself — on paper, anyway.

“Regulators have observed index annuity disclosures that suggest annual returns can range from 10%–25% for several years. This has brought up potential concerns around whether consumers are receiving reasonable expectations regarding future performance upon purchasing an annuity.”

— NAIC Life Insurance and Annuities Illustrations (A) Working Group, Exposure Question, February/March 2026

What’s Behind the High Numbers: Three Interlocking Problems

CANNEX Research — an independent annuity data and analytics firm — submitted one of the most technically detailed comment letters to the Working Group on March 23, 2026. Their analysis identifies three interlocking mechanisms that interact to produce illustrations that can “materially exceed reasonable consumer expectations.”

1. The Renewal-Rate Assumption (and the Bonus Amplifier)

Current NAIC rules (Model #245, Section 6-F-8) require that non-guaranteed elements like caps, participation rates, and spreads be “no more favorable than current non-guaranteed elements.” In practice, most carriers read this as: hold today’s initial-term rate constant for all illustrated years.

The problem: initial-term rates are deliberately set higher as a competitive marketing tool. Carriers price in the expectation — baked into the product’s economics — that renewal rates will be lower. The illustration never shows that renewal-rate haircut.

When a premium bonus is layered on top (e.g., a 10% upfront credit to your account), the distortion compounds. The product is priced as a package: the bonus is recouped through lower renewal rates or higher charges over the contract’s life. But the illustration shows both the generous bonus and ongoing returns at the initial (introductory) rate. As CANNEX writes: “The illustration fails to reflect the intended economic trade-off embedded in the product design, producing a materially inflated trajectory of account value growth.”

What this means for shoppers: A policy that illustrates 15% annually may be priced to deliver 6%–7% after the first term. The bonus isn’t free money — it’s being financed by future interest credits you may never receive.

2. Scenario Selection Bias (Historical Windows in a Bull Market)

Model #245 requires three illustration scenarios — the most recent 10-year index history, the best 10-year window from the past 20 years, and the worst 10-year window from the past 20 years. Sounds balanced. The problem is timing.

The post-2008 equity bull market was historically exceptional. For many standard indexes, both the “most recent” scenario and the “high” scenario draw from this same peak period. The “low” scenario — the worst 10-year window from the past 20 years — may itself reflect above-average performance by historical standards. As CANNEX explains: “For many common indices, this means the ‘high’ and ‘most recent’ scenarios are drawn from near-peak historical performance.”

The problem is even more acute for newer bespoke indexes. Many managed-volatility and “excess return” indexes used by FIA carriers have been engineered with back-tested histories that were optimized for favorable performance metrics. If the index has existed for only 10–15 years (the current minimum under Model #245 is 10 years of live history), the available windows are narrow and may not span a complete market cycle.

NAIC Working Group Chair Ben Slutsker, Director of Life Actuarial Valuation at the Minnesota Department of Commerce, noted that competitive pressures may be driving carriers to lean into increasingly aggressive illustrated rates to win sales, according to a March 2, 2026 Life Annuity Specialist survey cited in the CANNEX letter.

What this means for shoppers: An illustration using a “proprietary index” with only 10–12 years of live data — much of which overlaps with a bull market — should be treated with significant skepticism. The backcasted period (before the index actually existed) is synthesized data, not real investor experience.

3. Economic Inconsistency: Mixing Today’s Rates with Yesterday’s Scenarios

This is the subtlest but potentially the most significant distortion. Strategy rates — caps, participation rates, spreads — are directly tied to an insurer’s options budget, which is itself a function of the prevailing interest rate environment. When bond yields are high, carriers can buy more options, which supports more favorable crediting terms.

When an illustration applies today’s strategy rates (set in a high-yield environment) to a historical scenario that began in a low-yield environment, the result is economically incoherent. CANNEX: “The illustration assumes both (a) the strong index returns that occurred when rates were low, and (b) the favorable strategy parameters that exist because rates are currently high. In the real world, these two conditions are unlikely to coexist.”

What this means for shoppers: An illustration built on today’s generous caps applied to the 2010–2019 S&P 500 run may be combining the two best possible inputs into a single hypothetical — one that has never and may never exist simultaneously in a real contract.

How an Illustration Can Look Great but Still Mislead

Understanding the difference between what’s guaranteed and what’s merely illustrated is foundational to evaluating any annuity. Here is what Model #245 itself requires the illustration to distinguish — and what shoppers should look for:

What’s Guaranteed vs. What’s Illustrated

Element	What “Guaranteed” Means	What “Illustrated” (Non-Guaranteed) Means
Minimum interest rate	Contractual floor — often 1%–3%; will never go below this	—
Cap rate / participation rate / spread	Only guaranteed for the initial term (often 1 year)	Illustrated at current rates, which the carrier can lower at renewal
Account value growth	Guaranteed minimum accumulation value (often modest)	Non-guaranteed projected value based on historical index scenarios
Cash surrender value (CSV)	Must be shown alongside account value; reflects surrender charges	May be significantly lower than account value during the surrender period
Premium bonus	The bonus credit itself is contractually added — but vesting is often 5–10 years	Future illustrated returns assume the bonus plus unchanged renewal rates
Index-based credited interest	0% floor (you won’t lose principal to index declines)	Illustrated using historical index returns — actual future credits are unknown
Index performance	N/A — the index is not guaranteed by the insurer	Illustration assumes index repeats history; disclaimer required by Model #245
IMO / agent compensation	—	Commissions are not deducted from your premium but affect product design

Model #245, Section 6-G(4)(b) requires every FIA illustration to include this statement: “This illustration assumes the index will repeat historical performance and that the annuity’s current non-guaranteed elements… will not change. It is likely that the index will not repeat historical performance, the non-guaranteed elements will change, and actual values will be higher or lower…”

If you do not see language like this in the illustration you’ve been shown, ask why.

Model #245 in Plain English

The NAIC Annuity Disclosure Model Regulation (#245) is the current federal-style template that states adopt (adoption is voluntary but widespread) to govern what must be disclosed when an annuity is sold and how illustrations must be constructed. Its core job is to ensure buyers receive a disclosure document and a buyer’s guide at or before application.

For FIAs specifically, Section 6-F prescribes the three-scenario illustration framework (most recent 10 years, worst 10-year window, best 10-year window from the past 20), the rule that non-guaranteed elements must be “no more favorable than current” elements, and the requirement that any index used must have at least 10 years of live history.

Why it’s now under the microscope: Several commenters at the March 31, 2026 Working Group meeting noted that Model #245 was designed before the explosion of proprietary index products and the current bull-market distortions. Slutsker acknowledged that Model #245 “includes requirements for annuities, but those requirements do not require complexity” — suggesting regulators believe the rules could be workable with targeted modifications.

The Working Group’s current exposure question (comment deadline May 18, 2026): “What should be the starting point of a short-term solution: Model 245 language or something else (such as AG 49-A, other guidance, or starting anew)?”

Short-term vs. long-term: Slutsker announced a two-track approach. A short-term fix — potentially within a year — would address the most pressing illustration concerns, likely through targeted modifications to existing guidance. A longer-term overhaul would address deeper structural issues like scenario modernization and economic consistency requirements.

Model #275 (“Best Interest”) and the Replacement Red Flag

Model #245 governs how annuities are illustrated. Model #275 (Suitability in Annuity Transactions Model Regulation) governs whether an annuity should be sold to you at all — and whether replacing an existing contract is in your interest.

As of August 2025, 49 jurisdictions had implemented the 2020 “best interest” revisions to Model #275. Under the revised model, a producer must satisfy four obligations:

1. Care: Use “reasonable diligence, care and skill” to understand your financial situation, needs, and objectives; have a reasonable basis to believe the recommended annuity actually serves your circumstances.
2. Disclosure: Disclose their role, compensation, and any material conflicts of interest. If you ask, your agent must estimate the commission they will receive.
3. Conflict of interest: Avoid or disclose material conflicts; the producer’s financial interest may not be placed ahead of yours.
4. Documentation: Put the basis for the recommendation in writing.

The illustration-suitability nexus matters most in replacement transactions — where a consumer surrenders an existing annuity to buy a new one. Regulators are particularly focused on whether inflated illustrated rates are being used to make a replacement look more attractive than it really is, especially when the consumer gives up:

• Accumulated surrender-free withdrawal privileges
• Vested bonuses from the existing contract
• A favorable guaranteed benefit base
• Lower surrender charges that have been burning off over time

The NAIC’s Annuity Suitability Working Group’s 2026 agenda explicitly targets the development of training materials for regulators on Model #275 and a best-practices resource document for insurers — a signal that enforcement focus is intensifying.

What you should receive in writing: Before signing, your agent must provide you with the disclosure document (per Model #245), the Buyer’s Guide, and — under Model #275 — written documentation of their recommendation and the basis for it, including any replacement analysis comparing what you’d be giving up vs. gaining.

Market Data and Scanning: Regulators Move to Real-Time

Currently, the NAIC’s primary market data tool — the Market Conduct Annual Statement (MCAS) — collects data with an effective time lag of nearly a year by the time it is filed, reviewed, and usable. More critically: the NAIC currently has no means of collecting data on complaints involving illustrations.

The NAIC’s 2026 Strategic Priorities include deepening its capabilities as a “data aggregator, analytics provider, and early warning monitor.” The A Committee has been assigned a specific “market data and scanning priority,” and at the March 23 meeting, the committee exposed a question asking industry whether technology can enable:

• Comparing projected accumulations in an illustration at time of sale with subsequent actual performance — identifying which annuities significantly fail to meet projections
• Monitoring IMO compensation incentives that may steer agents toward higher-illustrated products
• Monitoring what consumers actually see (advertising, marketing materials)
• Aggregating findings to provide early feedback to industry for real-time course correction

New illustration-specific complaint coding is also being created within the NAIC’s Regulatory Information Retrieval System (RIRS) to capture adjudicated regulatory actions involving illustrations that are “inadequate, misleading, or not provided when required.”

What this means for the market: If regulators gain the ability to compare illustrated rates against actual credited rates at scale, products and carriers with large gaps between the two will face targeted examinations. This is an industry-reshaping development if it proceeds as described.

The Buyer’s Guide Update: What’s Changed Since 2013

The NAIC’s Annuity Buyer’s Guides for Deferred Annuities were last updated in 2013 — before RILAs became a major product category, before MYGAs surged, and before 49 states adopted the best-interest standard. The Annuity Buyer’s Guide Working Group, formed in late 2025 and chaired by Wisconsin Chief Legal Counsel Lauren Van Buren, exposed a draft revision on March 16, 2026 for a 30-day comment period and discussed comments on April 20, 2026.

Key additions and emphases in the March 16, 2026 draft:

• Product coverage: The draft adds sections on RILAs, MYGAs, and explicitly distinguishes all four major deferred annuity types: Fixed/MYGA, FIA, RILA, and Variable.
• Surrender charges and illiquidity: The draft states plainly that “annuities are considered illiquid during the surrender charge period” and warns that surrender periods can extend “up to 10 or more years.”
• Bonuses: The draft covers both premium bonuses and persistency bonuses, warning that “you could lose some or all of the bonus if you take money out of your annuity during the vesting or waiting period” — vesting periods that “can often range up to seven (7) or 10 years.”
• Illustrations are not guarantees: The draft includes a direct statement: “Illustrations are not promises or guarantees. They often rely on current or historical interest rates, index performance, or other assumptions that do not reflect expected future performance and will likely change. Ask specifically which values are guaranteed and which are hypothetical.”
• Best interest standard: The draft explicitly references that agents are “required to act in your best interest and consider your individual circumstances,” reflecting Model #275’s update — language absent from the 2013 version.
• Complexity warning: The introduction warns: “Failing to understand the terms of your annuity contract, which may be complex, can lead to financial loss.”

Industry response: Several industry trade groups raised concerns about the “tone and tenor” of the draft, arguing it is “unnecessarily negative” given that best-interest standards already require pre-sale disclosures and conversations. Consumer advocates countered that timing matters: the guide is currently delivered after a consumer has already decided to purchase. The regulator-only drafting group is preparing a second draft for further comment.

How to Evaluate a “High Illustrated Rate” Claim

If a producer shows you an FIA illustration with average annual returns above 10%, here is a framework for evaluating what you’re actually seeing:

Step 1: Identify the index. Is it the S&P 500, Russell 2000, or another well-established public index with a 20+ year live history? Or is it a proprietary “managed volatility” or “excess return” index created by an investment bank in partnership with the insurer? If it’s the latter, ask specifically: How many years of live (non-backcasted) performance does this index have?

Step 2: Understand which scenario you’re looking at. Model #245 requires three scenarios. The one most likely being shown to you is either “most recent 10 years” or the “high scenario” — both of which, for most equity-linked indexes today, draw from the post-2008 bull market. Ask to see the low scenario and note the account value in that scenario.

Step 3: Ask about the renewal rate. The illustration assumes today’s cap/participation rate/spread holds constant for every year of the contract. Ask the producer: “What has been the range of renewal rates this carrier has credited on this strategy over the last five years?” If they can’t or won’t answer, that is a red flag.

Step 4: Compare illustrated to guaranteed. The illustration must show guaranteed values alongside non-guaranteed values (Model #245, Section 6-F-10). Look at the guaranteed column. That is the floor scenario. The gap between guaranteed and illustrated is the range of uncertainty you are accepting.

Step 5: Check the surrender value, not just the account value. During the surrender charge period, the cash surrender value (CSV) may be materially lower than the account value. In a worst case — if you need funds early — the CSV is what you actually receive.

Step 6: Run the bonus math. If the product features a 10% premium bonus with a 10-year vesting schedule, model what happens if you surrender or die in year 4, year 7, and year 10. The bonus that looks like free money often comes with strings attached that require you to hold the contract for a decade or more.

What to Watch Next: Open Workstreams and Exposure Questions

The following items are live regulatory proceedings as of May 13, 2026:

Workstream	Status	Key Date
Illustrations WG — Short-term fix (Model 245 or other)	Comments due May 18, 2026; Working Group meeting May 27 and June 2	May 18 comment deadline
Annuity Suitability WG — Model #275 resource document	Seeking best-practice input from insurers	May 11 submission deadline
Market Conduct Modernization WG	New working group formed; assessing current framework and modernization options	No public deadline yet
Annuity Buyer’s Guide WG — Second draft	First draft discussed April 20; regulator-only drafting group preparing second draft	No public date set
NAIC technology/scanning question	Exposure question outstanding; industry responses being collected	Ongoing
A Committee — IUL/Premium Financing presentation	Dick Weber (LICAC) presenting to A Committee June 15, 2026	June 15

Watch the NAIC Life Insurance and Annuities Illustrations Working Group page and the Annuity Buyer’s Guide Working Group page for meeting materials and new exposure drafts.

Questions to Ask Before You Sign

Use this checklist when reviewing any deferred annuity illustration:

• What index is being used, and how many years of live (non-backcasted) performance does it have?
• Which illustration scenario am I looking at — most recent, high, or low? Can I see all three?
• What is the guaranteed value at year 5, year 10, and the end of the surrender period?
• What is my cash surrender value if I need the money in year 3? Year 5?
• What are the current cap/participation/spread rates, and are they guaranteed beyond the first term?
• If there is a bonus, what are the vesting conditions, and what happens to the bonus if I surrender early?
• What has been the range of renewal rates this carrier has credited on comparable strategies over the last 3–5 years?
• If I am replacing an existing annuity, what guaranteed benefits or surrender-free privileges am I giving up?
• Will you provide the basis for your recommendation in writing, including your compensation disclosure?
• Is this illustration software approved by the carrier, and is it dated within the last 30 days?

Five Actions to Take This Week

Before buying or replacing an annuity — especially a fixed indexed annuity — take these five concrete steps:

1. Request the full disclosure document, not just the illustration. Under Model #245, you are entitled to a disclosure document and the Buyer’s Guide at or before application. The disclosure document must describe what is guaranteed versus non-guaranteed, the crediting formula, caps/participation/spreads, and all fees. Do not sign an application until you have read this document.

2. Look up the index. If the illustration references a proprietary or “managed volatility” index, search for it by name. Find out when it was actually launched (not when its backtested history begins). An index created in 2018 with a backcasted history to 2004 has approximately 7 years of real-world data. The backcasted period reflects a simulation built with the benefit of hindsight.

3. Ask for a “reduced rate” scenario. Ask the producer to re-run the illustration with strategy rates reduced by 20%–30% from their current levels. This is not currently required by regulation (it is one of CANNEX’s short-term recommendations to the Working Group), but any reputable producer should be able to model it. If the projected account value drops precipitously, the illustration’s results are highly sensitive to the renewal rate assumption.

4. Request the replacement analysis in writing. If you are being asked to surrender or 1035-exchange an existing annuity, your agent is required under Model #275 to document why the new product is in your best interest. Ask for this documentation before the surrender paperwork is submitted. Verify that the analysis accounts for any bonuses, surrender charges, or guaranteed benefits you are forfeiting.

5. Use your free-look period. In most states, you have 10–30 days after receiving your contract to return it for a full refund or your current account value. Use this window to have a trusted, independent financial professional — ideally one with no economic stake in your decision — review the contract, the illustration, and the disclosure document against what you were told during the sale. If anything doesn’t match, stop the transaction.

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This article is for educational purposes only. It does not constitute legal, tax, or investment advice. All regulatory details are current as of May 13, 2026, and are subject to change as NAIC workstreams advance.

Primary sources: JD Supra, “Under the Microscope” (May 11, 2026) · NAIC A Committee Spring 2026 Agenda & Materials · NAIC Illustrations Working Group Page · NAIC Annuity Buyer’s Guide Working Group Page · CANNEX Comment Letter, March 23, 2026 · Draft NAIC Buyer’s Guide for Deferred Annuities, March 16, 2026 · NAIC Model #245 · NAIC Model #275 · Sidley DataMatters, Spring 2026 NAIC Highlights · InsuranceNewsNet, April 20, 2026