Last August, I testified at a public discussion regarding possible additions to the California Code of Insurance Regulations, dealing with annuities sales to seniors -changes that are being prompted by new powers awarded to the state’s Insurance Commissioner.

One of the main arguments I heard from plaintiff attorneys was the age of the client. Does this mean that annuities are unsuitable for everyone over a certain age? It appears so. Section (g) of version one provides, “The insurer is presumed to have violated the duty of good faith and fair dealing if the insurer issues an annuity to:

1. A prospective insured who, pursuant to the standardized actuarial tables, is unlikely to live through the surrender penalty period?

2. A prospective insured who, pursuant to the standardized actuarial tables, is unlikely to be alive for X years after the policy annuitizes?

6. A prospective insured when surrender charges may be imposed on the death of the annuitant?

8. A prospective insured aged 65 or older when the annuity is a deferred annuity.

Yes, that’s right! If the insured is over age 65, the insurer cannot issue the annuity.

Obviously this is troubling to say the least. One of the points brought up surrounding this issue is LTC liquidity. One could see how a senior could have a problem where all their liquid net worth was in a product that had a long surrender period with no liquidity provisions. As the advisor it is up to you to see if the product you are recommending has some waiver of surrender penalties if LTC occurs. Also it would be important to have a product that allowed free withdrawals of at least 10 percent of the investment per year. Surrender penalties continue to be the issue and they must be discussed and understood by the clients who get into them.

A further problem with the proposed regulation is that it fails to distinguish between those who are registered representatives and those who are not and what training should apply. Typically registered persons are supervised by an OSJ as well as their broker/dealers’ compliance department. Those who are unregistered are supervised by the compliance departments with the respective insurance company the agent writes business for. The proposed regulation contained the following provision: (e) The insurer shall develop and maintain a set of written standards that will take into account at least the circumstances listed in subdivision (c) above. The insurer shall train its agents and all others transacting on the use of these standards and shall require that its agents and others follow these standards. The insurer shall make these standards available to the Commissioner upon request.

The question becomes how will the insurers effectively train their agents on the use of section (c)? To this date, to my knowledge, most CE is provided online with the exception of the California LTC Partnership, where every two years an agent is required to attend an eight-hour class.

During my testimony, I asked whether or not the Department had any statistics on the number of complaints received prior to SB 620 and those received after it passed. Specifically, I wanted to know if there was any hard data on the difference, given the educational component of the bill. The bill required an eight-hour annuity course that was delivered via the Internet. My point was that after I (and others) had worked so hard for the subcommittee for the Department of Insurance to create the outline for the course providers, I was displeased to see the delivery via the Internet. Training and education are still the answer. A possible solution could be an in-class course, much like the LTC Partnership class with mandatory recurring training modules.

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