The New York State Insurance Department is drafting advice that would encourage annuity sellers to warn consumers about the dangers of taking early excess withdrawals.

Insurers that are selling annuities with guaranteed minimum withdrawal benefit features should provide disclosure “in the sales presentation before the contract is issued and again at the time an excess withdrawal is requested,” Michael Maffei, chief of the New York department’s Life Bureau, writes in a draft circular letter posted on the department’s website.

Although GMWB features are valuable to annuity holders who end up needing immediate access to their funds, and life insurers have been using proportional reductions to control GMWB-related antiselection, “the sales presentation should clearly explain the effect of taking an excess withdrawal and provide at least one numerical example showing how a proportional reduction will impact the guaranteed withdrawal amount,” Maffei writes.

When an annuity holder asks for an excess withdrawal, the insurer should clearly explain how the excess withdrawal will affect the holder’s guaranteed withdrawal amount, to help the holder make an informed decision about whether to take the withdrawal, Maffei writes.

A “best practice” would be to let a holder cancel an excess withdrawal within 30 days of making the withdrawal by returning the withdrawal to the company, Maffei writes.

For in-force contracts with GMWBs that provide for a proportional reduction of the guaranteed withdrawal amount, insurers should explain the consequences of a withdrawal when the holder asks for a withdrawal, Maffei adds.