Annuities

Suitability ****

Suitability is the appropriateness of a product recommendation to consumers. Insurance companies have to establish standards and procedures for recommendations to make sure the needs of consumers are properly addressed.

Definition of replacement (same as earlier)

When it is known or should be known to a proposing agent or insurer that a policy is:

• lapsed, forfeited, surrendered, or otherwise terminated
• converted to
  • reduced paid up
  • extended term or
  • reduced in value by the use of nonforfeiture benefits or other policy loans
• amended as to effect either
  • a reduction in benefits, or
  • a reduction in the term for which coverage otherwise would have been extended
• reissued with any reduction in cash values, or
• used in a financed purchase

Suitability information *****

• age
• annual income
• financial situation and needs
• financial experience
• financial objectives
• intended use of the annuity
• financial time horizon
• existing assets, including life insurance
• liquidity needs
• liquid net worth
• risk tolerance
• tax status

Duties of insurers and insurance representatives *****

When recommending the purchase of annuities the agent must take into account the information gathered from the suitability questionnaire (listed above) and be sure of the following:

• the consumer has been made aware of the features of an annuity, such as surrender charges, tax penalties, and fees
• the consumer would benefit from certain features; tax deferred growth, annuitization, etc.
• if an annuity is being replaced, the replacement must be deemed suitable after considering the following:
  • if the consumer will have a surrender charge
  • if there will be a new surrender period
  • if the consumer will lose existing benefits or be subject to increased fees
  • if the consumer will benefit from enhancements and improvements
  • if the consumer has had another replacement or exchange within the last 36 months

Before the exchange or replacement, the agent must make reasonable efforts to obtain this suitability information, and if found not suitable the insurance company will not issue the annuity. However, the insurance company or the agent does not have this obligation to the consumer if:

• a recommendation has not been made
• a recommendation was made but was based on inaccurate material supplied by the consumer
• a consumer refused to provide relevant suitability information
• the consumer decides to enter into an annuity against the advice of the agent

Before the replacement, the agent must provide on form DFS-H1-1981 information that compares the difference between the annuity being replaced and the annuity being recommended.

Insurance companies must establish a supervision system to monitor compliance with this section. Such a system includes:

• informing agents of these requirements and putting those requirements in training manuals
• providing product-specific training and materials
• maintaining procedures for the review of each recommendation before issuance of an annuity
• maintain reasonable procedures to detect recommendations that are not suitable
• providing annual reports to senior managers responsible for audit functions; this is designed to determine the effectiveness of the supervision system

Record keeping

Information collected to determine suitability must be kept for five years.

Prohibited practices

Annuities issued to seniors age 65 or older must have surrender charges on a reduced schedule so that there are no charges after the end of the 10th year of the policy, and surrender charges can not exceed 10% of the amount withdrawn.