April 2010
Suitability of Non-Variable Annuity Sales
The question of whether annuities are suitable for the policyholders they are sold to has drawn attention recently. State insurance departments, annuity insurers, annuity producers and customers all have a stake in the suitability of annuity sales.
Numerous states have enacted laws and requirements regarding suitability of annuity sales. Annuity insurers have developed forms for your use to collect pertinent information and to describe annuity products to help you with your determination of a suitable sale. And consumers are looking to enhance their financial security by relying on your product knowledge and expertise to help them make the right decisions.
It is in the best interests of all stakeholders, especially our customers, to ensure that every annuity product recommendation meets customers’ financial goals and desires. To support you during the sales process, The Standard has developed the following guidelines for annuity sales suitability.
I. WHAT DO I NEED TO DO TO MEET THE STANDARD’S SUITABILITY REQUIREMENTS?
You must collect sufficient financial information from your client in order to determine that one of The Standard’s annuity products is a suitable sale. Next, simply follow these steps:
- Complete the appropriate Acknowledgement of Suitability in an Annuity Purchase form, with both your signature and your customer’s signature, and submit the form with the original signatures to The Standard with the annuity application. Leave a copy with your customer, and keep a copy for your file.
- Leave a copy of all advertising and marketing materials you’ve used during your presentation with your customer. Keep a copy of each for your file.
- Leave a copy of any illustrations you’ve used with your customer. Keep a copy of each for your file.
- Keep the written and documented information you collected for your suitability determination.
- Provide your customer with the Product Disclosure developed by The Standard that provides a full description of the recommended annuity. If it’s an indexed annuity, have your customer sign the Product Disclosure and send the Disclosure with the original signature to The Standard together with the annuity application. Keep a copy for your file.
- Keep your client’s financial information on file for ten years, or as long as the annuity exists, whichever is longer. This will ensure they are available for any suitability audit conducted by The Standard or any government office.
II. WHAT MAKES A SALE SUITABLE?
The determination of suitability should not be viewed as an intrusive requirement that states impose upon us. Instead, think of it as the keystone to providing appropriate financial advice and sales recommendations. A suitable annuity sale is not defined by looking at any one set of specific factors. Rather, it is the process of ensuring that the products and financial instruments you recommend truly and reasonably meet your clients’ needs given their financial goals, desires and status. The process includes:
- Identifying your customer’s financial needs and objectives,
- Compiling information about your customer’s current financial information,
- Comparing those financial needs and objectives to your customer’s current financial status,
- Determining the financial priorities based on that comparison,
- Making a recommendation of a product or set of products that meets those priorities, and
- Fully describing all the product features so that your customer understands the reasons for and agrees with your recommendation.
III. WHAT INFORMATON SHOULD I COLLECT?
You will want to collect and document information that will contribute to your making a suitable sales recommendation. The following list is a good start:
- Your customer’s financial goals and objectives
- The timeline associated with those financial goals and objectives
- Age (including age of your customer’s dependents if they are part of the financial goals and objectives)
- Marital status
- Tax status
- Occupational status
- Financial situation and needs, including:
- Annual income
- Annual income requirements, including future income need projections and the possibility of financial emergency needs
- Sources of income
- Intended use of the annuity
- Existing assets, including investment and savings instruments as well as other insurance/annuity holdings
- Liquidity needs
- Liquid net worth
- Risk tolerance
- Other information reasonably used or considered in recommending annuities to customers
And remember: DOCUMENT, DOCUMENT, DOCUMENT. Get all of the above information in writing. Ask your customer to review it and to sign-off that it is accurate to the degree that the customer has disclosed the above information to you.
IV. ARE THERE ANY "RED FLAGS"?
Some information you collect may be a red flag that would require you to further investigate your customer’s financial situation and balance it with his/her financial goals. Examples of red flags are:
- Your customer is a senior citizen
- Your customer has inadequate income or just barely enough income to meet current financial needs
- Your customer lacks tax benefit from the purchase (0–15 percent bracket)
- The annuity represents a disproportionate percentage of your customer’s total net worth
- Your customer has insufficient liquid assets
- Your customer is refinancing a principal residence or using a reverse mortgage to fund the annuity
- The annuity's surrender charge schedule is longer than the customer's life expectancy
- The transaction requires borrowing from an existing policy
- The transaction is a replacement
- The transaction involves a replacement which results in reduced benefits to the customer
- There is an excessive switching or replacement of annuities
- The transaction involves the imposition of surrender charges on a replaced annuity
If you uncover any of these instances or other red flags, you need to address those concerns with your customer. Unsuitable sales simply are not acceptable.
V. WHAT DO I DO WITH THE INFORMATION?
This is the point where your knowledge, expertise and experience are crucial. Use your expertise to:
- Keep your customer’s financial goals and objectives in mind,
- Balance them with the information you’ve collected,
- Identify how the benefits are to be used (income today, investment accumulation and income at some point in the future, tax-deferred growth, transfer of wealth to heirs, etc.), and
- Identify financial instruments that meet those goals given the time period of the need.
VI. I HAVE PRODUCTS IN MIND, NOW WHAT?
The next step is to disclose the features of the product or products you’re recommending. Your customer must understand the product features and how the product and its features reasonably meet his/her financial goals.
Make sure your customer understands the following features:
- Current crediting interest rate
- Interest rate guarantees
- Length of surrender period
- Surrender charges
- Other applicable fees or charges
- Liquidity features and limitations
- Bonus features
- Cash surrender values
- Death benefit values
- Tax-deferred growth
- Annuitization, including payout options
- Potential charges or reduced crediting rates for optional features or riders
- Potential tax penalty if customers sell or redeem the annuity before reaching age 59½
- Applicable premium tax implications
- Other features specific to the recommended annuity product
If your recommendation includes an indexed annuity, you will also want to make sure your customer understands the following features:
- The index used for determining interest crediting for the index account
- The determination of interest based on movement of the index
- The time period over which the index movement is used to determine interest crediting
- When partial index crediting will apply to partial and total surrenders
- Any index rate cap, if applicable
- Any participation rate, if applicable
Process Overview:
By
- using the information you’ve obtained from your customer and documenting it, and
- fully disclosing the features of the annuity you are recommending,
You Are
- substantiating the suitability of your sales recommendation and
- building confidence in your customer and his/her reliance on your recommendation and agreement of its appropriateness -- a reliable combination.