A number of states, such as Iowa and Minnesota, have specifically addressed suitability in their rules and regulations for more than a decade. It has also become common practice for state insurance regulators to address suitability concerns through their states’ Unfair Trade Practices Act. More recently, states adopted the NAIC Suitability in Annuity Transactions Model Regulation, Model No. 275 (the “Model Regulation” — visit NAFA for a complete list).
The Model Regulation imposes the following suitability requirements: “In recommending to a consumer an annuity, there shall have reasonable grounds for believing that the recommendation is suitable upon the basis of the facts disclosed by the consumer as to his or her investments and other insurance products and as to his or her financial situation and needs.”
Fixed declared rate annuities and indexed annuities can help consumers accumulate assets and manage risk. Fixed annuities should be considered a valid part of a prudent retirement and asset management plan for some portion of a consumer’s assets.
All parties in the sales process, including insurers, marketing organizations, producers, and consumers, should make reasonable efforts to avoid inappropriate, unsuitable, fraudulent, or misleading sales tactics.
Because of the long history of state insurance regulation, its continuing evolution to adapt to new products and market challenges, and the distinctly different value and sales considerations of insured products as opposed to securities, many believe that fixed indexed annuities and indexed life insurance products that comply with insurance laws are best regulated exclusively as insurance and not as securities.
NAFA has produced a paper on the principles of suitability, which offers the following highlights:
- An annuity sale should only take place if it benefits the consumer in light of each consumer’s specific liquidity and financial needs. Consideration should be given to what values and benefits are available to the buyer and what risks or opportunity costs will be borne by the purchaser under various possible future scenarios, including emergency surrenders or partial withdrawals, the need for guaranteed income, and money needed for medical needs or for the owner’s loved ones at death.
- Proper evaluation of these scenarios requires the consumer both to give information to and receive information from the producer. Thus, every purchase decision should be a collaborative and educational process. Processes should be in place to ensure that each consumer provides relevant information to the producer so that the producer may advise the consumer as to an appropriate product, but also so that the producer may inform the consumer of benefits, features, risks, and opportunities. Sales recommendations should consider whether the necessary liquidity would be met by the annuity or by other assets available to the consumer. The analysis may result in the producer advising the consumer not to purchase a fixed annuity.
- To the extent that the recommended annuity is replacing another financial product, the producer should consider whether the recommended annuity satisfies the consumer’s financial objectives, situation, and needs better than the replaced financial product, and consider any charges, fees, and income tax implications involved in the replacement transaction.
- Because the suitability analysis may be challenged later, the producer should document the suitability analysis and discussion.
- Insurers should provide producers with a suitability form to capture important information about the consumer. They should also have a process to ensure that producers use the suitability form consistently and that all information is being obtained since this provides the best assurance of an adequate suitability review.
In this monthly column, the National Association for Fixed Annuities (NAFA) will provide essential information about fixed annuity product features, regulation, tax issues, and industry news. We invite you, the reader, to send us any questions that you often hear — or that you may have yourself. Submit your questions to [email protected] with the subject line “Fixed Annuity FAQ” to have your problems answered here.
The National Association for Fixed Annuities (NAFA) is a national trade association exclusively dedicated to promoting the awareness and understanding of fixed annuities — including income, declared rate, market value adjusted, and indexed. You can follow NAFA on Twitter at www.twitter.com/nafausa.