New York Fines Nationwide Over Deferred-to-Immediate-Annuity Exchanges

What You Need to Know

Like other states, New York requires sellers helping consumers exchange annuities to provide disclosures.
The state has been focusing on exchanges of deferred annuities for immediate annuities since at least 2016.
The state has announced about $29 million in penalties and restitution payments in connection with the issue.

The New York State Department of Financial Services is continuing to push insurers to treat consumers who roll assets from accumulation annuities into income annuities the same way they treat consumers making other types of annuity exchanges.

The department announced Friday that it has imposed $2.245 million in penalties on Nationwide Life Insurance Co. in connection with deferred-annuity-to-immediate-annuity exchanges.

The department will also require the company to pay $3.4 million in restitution to New York state consumers.

Nationwide — the Columbus, Ohio, mutual insurer that is Nationwide Life’s parent — said in a statement that it’s pleased to put this matter behind it, and appeared to imply that the matter was at least partly the result of problems with communications.

“We continue to urge the NYDFS to focus on promoting clearly articulated regulatory expectations for all industry participants in a manner that protects consumers while concurrently protecting their access to affordable and innovative product offerings,” Nationwide Life said.

What It Means

The oldest baby boomers are turning 76 this year. Now that large numbers of baby boomers are starting to use annuities, life insurance policies and other financial products to create streams of retirement income, what might have looked like plain vanilla income-generating transactions in the past might lead to new, unexpected types of fights with regulators.

Retirement planners, annuity specialists and other financial professionals may have to ask themselves whether they are applying the same kinds of safeguards to income-generating activities that they would have applied to clients’ efforts to build up assets.

Deferred Annuities vs. Immediate Annuities

Some consumers use deferred annuities to save and invest money for retirement.

An insurer might design a deferred annuity in such a way that it will begin generating a stream of income years, or decades, after the consumer buys it.

Some consumers use asset withdrawals to pull cash out of deferred annuities. Those consumers may never use the annuities to create steady streams of retirement income payments.

Other consumers who do want steady streams of income may replace deferred, asset-accumulation annuities with annuities designed to maximize income streams.

An immediate annuity is a type of annuity that begins paying a steady stream of benefits immediately after the consumer buys it.

The New York Warning

In the past, some consumers complained that insurers and insurance agents rushed them into replacing annuities that suited their needs with less suitable annuities.

Because of that history, New York and other states require agents and insurers to put consumers’ annuity exchanges through a suitability review process. The providers of the new annuities must give the consumers who are exchanging the annuities disclosure notices.

The Nationwide Life Action

The New York department’s investigation found that Nationwide “failed to properly disclose to consumers income comparisons and suitability information, causing consumers to exchange more financially favorable deferred annuities with immediate annuities,” officials said.

The disclosure problems affected hundreds of New York state consumers.

Because the consumers received incomplete information about replacement annuities, they received “less income for identical or substantially similar payout options,” officials said.

New York State Superintendent of Financial Services Adrienne Harris said in a comment about the regulatory action that the department wants to protect New Yorkers.

“Today’s settlement puts money back in the pockets of impacted consumers, contributing to greater financial stability and protection for individuals and their families,” Harris said.

In addition to agreeing to pay the penalties and restitution, Nationwide has agreed to change its disclosure statements to include side-by-side monthly income comparison information, New York officials said.

The company has also agreed to update its disclosure, suitability and training procedures, officials said.