Legislation pending in two states could have a significant impact on annuity sales by tightening rules surrounding the sale of annuities to older Americans.
In Florida, lawmakers were contemplating extending the free-look period for annuities to one year for consumers age 75 or older (SB 2082).
In Connecticut, a pending bill (SB 155) prohibits the sale of all variable annuities to any resident age 65 and up. The draft language illustrates what many consider to be extreme measures taken by legislators to curb financial abuses.
Some of this reflects how the legislative process works. In states, bills are usually drafted by legislative staff members or government agencies. But insurance legislation often starts with a constituent contacting a state representative, to bring a negative personal experience to the attention of lawmakers. If it happened to them, they reason, it’s happened to others. Missing is acknowledgement that addressing a single voter’s problem does not necessarily make good law for the masses. In law school, students are often taught that bad facts create bad laws. Such is true for insurance regulations.
Since each insurance sale is particular to the individual, the challenge, when drafting laws around a single specific situation, is to keep the legislation from becoming too narrow, too focused and too exclusionary.
Let’s apply this to the new proposals. Both contemplate restricting the sale of annuities based solely on age.
Such a restriction is concerning. It is widely known that Americans are living longer than previous generations and that, accordingly, retirement savings will need to last longer. Annuities were designed to create an income stream that annuitants cannot outlive, an increasingly important factor now that defined benefit pensions are alarmingly underfunded and rarely available through employers. So, the ability to use annuities for guaranteed retirement income is critical, yet legislation is seeking to restrict availability of annuities to older Americans. It’s a catch-22.
Restricting sales based on age is not a new concept. Individuals older than age 65 have been a legally protected class, not just for insurance sales, for decades.
Heightened protection for those over age 65 is considered good public policy. Remember in 2003 when the National Association of Insurance Commissioners initially adopted its “senior” suitability model? It applied to annuity sales made to those aged 65+. By 2006, the age restriction was removed making the annuity suitability model applicable regardless of age. This change is noteworthy considering the behavior the regulations attempt to curb.
It is clear that abusive insurance sales practices are not limited to transactions with those ages 65 and older.
The issue is not exclusively age. The issue is the appropriateness of the sale considering how the product is being used. Merely restricting annuity sales based upon age may eliminate one problem while creating significant additional problems. Annuities are extremely useful for individuals age 65+. If positioned properly, annuities serve a much needed purpose.
Both Connecticut and Florida are reviewing each pending bill and will undoubtedly discuss revisions as interested parties become involved in the process.
The proposed legislation in Connecticut will make it illegal to sell a VA to anyone 65 and older. If passed, the bill will prevent such sales effective January 1, 2009.
At the first public hearing on the bill, testimony confirmed the motivation stems, at least in part, from a specific transaction reported to the state representative. Admittedly, the aim is to protect seniors from fraud. But preventing all VA sales to seniors is similar to preventing all children from leaving home for fear they’ll get hurt. Also, the bill ignores 1035 exchange and taxed deferred growth benefits in annuities.
Of special concern is that the Connecticut restrictions will be expanded to include fixed annuities as well. After all, legislation tends to move in trends. Coming at a time when an income stream is crucial for seniors, this is risky business.
Regarding the Florida bill, the legislature has since decided not to proceed with extending the free-look period to one year for those ages 75+. Florida has, however, proposed an increase in agent training for annuity and life insurance producers on the subject of suitability.
Florida is also proposing changes to its suitability rules and additional replacement laws. The proposed suitability bill rejects NAIC suitability language by adding more specific references in the NAIC general categories of information (financial status, investment objective, tax status and other relevant information necessary to make a suitable recommendation).
As the legislative year progresses, states will likely highlight suitability, replacement and agent training requirements.
Danette Kennedy is president of Gorilla Insurance Marketing, Inc. Waukee, Iowa. Her e-mail address is