Annuity FYI Blog

According to the National Underwriter article “NAIC Panel: History is Just History” by Allison Bell, history is unlikely to repeat itself in regards to annuities.  The National Association of Insurance Commissioners’ Life Insurance and Annuities Committee is working to revise the way that illustrations that compare annuities are shown.  They have what they call an “exposure draft” to revise the Annuity Disclosure Model Regulation.  An exposure draft is one step in the process of revising a model.  Comments will now be reviewed on the proposed revision regarding illustrations.

“Section 6″ is the proposed change and it would require illustrations to be clearly labeled and include a disclosure statement.  All costs, fees, riders, and optional features have to be included in the annuity illustration.  For example, illustrations of the non-guaranteed amounts related to fixed indexed annuities have to not only show the history of the past ten years, but also the best and worst ten year span over the past twenty years.  The NAIC has determined that it is not likely that history will repeat itself when you compare annuities.  Disclosures have to let investors know that while illustrations assume that history will repeat itself, it is likely that history will not.  Returns may be higher or lower than the illustrations show, but they probably won’t be the same.

Four more states and the District of Columbia will ensure that consumers are getting the best annuities by the end of this summer, according to Linda Koco of Insurance News Net.  In “More Annuity Suitability Rules Going into Effect This Summer,” the Annuity News editor says that the newest states to adopt the NAIC’s rules will be Rhode Island, Oregon, Ohio, North Dakota and Washington D.C.  The NAIC’s Suitability of Annuity Transactions Model Regulation (NAIC 2010) has been a model for many states to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act.  All states must comply by June 16, 2013.  States must ensure that insurance companies are selling consumers the best annuities for their situation and require agents to take a four hour class about annuities and their impact on consumers and taxes.

There are 17 states and territories that already have laws mimicking NAIC 2010.  Six states have plans already in the works, and a total of 28 states are expected to have working plans this year.  The Insured Retirement Institute (IRI) and RegEd, a compliance and education firm, are working together to provide the annuity training to agents and state governments.  The Oregon Department of Consumer and Business Services found that most insurance companies and agents have been receptive to the new rules, as long as they are similar to the NAIC guidelines.  In 2005, the state issued guidelines deterring the sale of unsuitable annuity products and these new guidelines have built from that initial model.  Products like the 5 year fixed annuity and other annuities must be the best choice for the consumer in order to pass the standard ruling.  All of the NAIC regulations keep insurers and agents accountable for protecting consumers from products that they should not buy because they aren’t in their best interest.

New York State is the latest to issue legislation adopting the National Association of Insurance Commissioners’ guidelines.  Errol Baddoo of Annuity News Journal discusses the new regulations in “New York Insurance Department Changes Regulations.”  The New York State Insurance Department has two new regulations dealing with annuities and other insurance products.  Both are meant to protect consumers, especially senior citizens, against purchasing products that are not suitable for their particular situation.

The first legislation, Regulation 199, makes sure that advisors and brokers do not use false titles to imply that they have a specialty that doesn’t exist.  This pertains to senior citizens most often because deceptive brokers use titles like “certified senior advisor” to try and attract immediate annuity or life insurance business from senior citizens.  The regulation bans the use of these titles in all advertising materials, including business cards, print ads, and television commercials.

Regulation 187 deals with suitability standards in the sale of annuities and other insurance products.  Salespeople are banned from selling unsuitable products to consumers, especially when the consumers don’t understand what they are buying.  Brokers and advisors must sell consumers the best annuities and life insurance for their particular situation and make sure that the consumers are fully informed regarding the products.  They have to be aware of all fees, tax liabilities, and any surrender charges as well as all other details for the products they are planning to purchase.

The new annuity suitability model was put in place to protect investors and ensure that they get the best annuities for them, but the extra training required for advisors may have a negative impact on the choices offered to investors.  Darla Mercado of Investment News talks about this double-edged sword in “Annuity exam overload could prompt product pruning.” Each annuity sold now requires a state mandated training course and exam in the states that have adopted the NAIC’s annuity suitability model.  So far nine states are using the model, but it is forecasted that all states will adopt the annuities model in the near future.  Because of the extra training required and the hours that the education and exams will consume, it is possible that advisors will work with fewer carriers and offer fewer products to their clients.

There is a general annuity course taken online which lasts approximately four hours.  After that, advisors must take specific training for each type of annuity product they sell.  This includes fixed annuities, variable annuities, and fixed indexed annuities, among others.  Training for each single product will take about an hour.  Advisors will have to show proof of their training in order to sell an annuity in the states who have already adopted the annuity suitability standards model.  Small insurers are worried that advisors will stop selling their annuities because of the extra training required.  It is possible that they will stick to the big companies like Prudential, MetLife, and Jackson National.  As annuities become more specific and are made to meet the needs of specific clients, this extra training may just keep the best annuities for certain investors out of their reach if their advisor hasn’t gone through the training to sell them.  Hopefully the new standards do not negatively impact the annuity industry that they are meant to help.

One of the biggest concerns that people have with annuities is the problem of unethical advisors selling investors products that aren’t right for them.  The National Association of Insurance Commissioners (NAIC) approved regulations last year to protect investors from such practices.  The Suitability in Annuity Transactions Model Regulations prevent advisors from selling senior citizens annuities that are not suitable for them.  When the model was approved, the NAIC’s goal was for every state in the U.S. to adopt the practices and monitor their financial transactions.  New York and California are coming on board now and adopting the suitability regulations in their states.

Annuities are excellent investments that provide a guaranteed lifetime stream of income to investors.  They have become increasingly popular during these difficult economic times where many older investors have lost a lot of money in the stock market.  It is important to compare annuities and figure out what is best in each individual situation though, especially for senior citizens and others close to retirement.  The California Department of Insurance plans to set up a supervision system for insurers selling products to investors age 65 and up.  In New York, the State Insurance Department will prohibit salespeople who are commission-based from using professional titles that market them as experts when they are not.  Senior citizens tend to be more trusting of these titles and can be coerced into an investment that may not be suitable.  That is why these suitability regulations are so important.