The New York State Department of Financial Services (DFS) announced Dec. 8 that it is conducting an industry-wide review of annuity replacement practices in New York – and has warned that it will take “appropriate action” with respect to life insurers, producers, and distributors found to have engaged in “improper replacements.”
It said that it has found that certain life insurance companies and fraternal benefit societies (collectively, “insurers”) and life insurance agents and brokers (collectively, “producers”) “are not complying with disclosure and suitability requirements when replacing a deferred annuity contract with an immediate income annuity contract.”
In new guidance, the DFS reminded life insurers, producers and distributors of their obligations under New York Insurance Law and regulations “to perform an adequate suitability review when recommending the sale or replacement of an annuity.”
According to the DFS, a suitability review requires sellers to determine the appropriateness of the sale or replacement of any annuity contract when recommending such a transaction to a consumer. Through examinations and investigation, the DFS said, it has identified “troubling practices” in annuity replacements that can cost New Yorkers thousands of dollars in retirement income.
“Annuities are crucial products for consumers to obtain retirement security,” said DFS Superintendent Maria T. Vullo. “Compliance failures among advisors, distributors, and insurers allowed improper replacement practices to occur. DFS will take decisive action to prevent industry practices that deprive consumers of the maximum amount of retirement income to which they are contractually entitled.”
Annuities are contracts between life insurance companies and individuals that are designed to provide guaranteed retirement income payments for the individual’s entire lifetime, and, as an option, the lifetime of a surviving spouse.
Immediate annuities are products that provide various payout options for guaranteed lifetime income. Deferred annuities are deposit-type products that allow consumers to accumulate money held by the insurance company and earn interest before the consumer starts receiving an income stream. Often, existing deferred annuities may provide for a larger guaranteed income amount than a new immediate annuity because of more favorable minimum interest rates and mortality rates.
The DFS said that, during the course of regular and targeted examinations, it discovered that some insurers, producers, and distributors have been recommending that consumers replace existing deferred annuities with immediate annuities. According to the DFS, the consumers were encouraged to do so without consideration of lost benefits and without being shown a comparison between the income benefit available under the consumer’s existing annuity and the amount available under the proposed annuity, in violation of New York Insurance Regulations 187 and 60.
Among other things, New York law requires that consumers thinking about buying a replacement annuity be provided a disclosure statement that provides information including a general side-by-side comparison of the anticipated future performance of the existing annuity and the replacement annuity.