THE NAIC SUITABILITY IN ANNUITY TRANSACTIONS MODEL REGULATION
We are required to inform producers of the requirements in the NAIC Model Law on Suitability in Annuity Transactions ("Model Suitability Regulation") in states where it has been adopted.
Most states have adopted the 2010 NAIC Model Suitability Regulation. In February of 2020, the NAIC approved revisions to this model regulation requiring producers to use “reasonable diligence, care and skill" in making recommendations and to act in the “best interest” of clients.
Below is an overview of the 2010 NAIC Model Suitability Regulation and the new obligations imposed under the 2020 NAIC Model Suitability Regulation. This is only a summary. Some provisions concerning insurer and producer obligations may not be described here. You are required to comply with all of the requirements applicable in the state in which you are selling or recommending the purchase of an annuity. State variations may either be noted here, they may be built directly into the Annuity Suitability Questionnaire, or they may be integrated into our internal policies and procedures, depending on the type of variation.
2010 NAIC MODEL SUITABILITY REGULATION OVERVIEW
You must have reasonable grounds for making the recommendation to purchase or exchange an annuity based on the information obtained from the client as well as a reasonable basis to believe the following:
- The client will benefit from certain features of the annuity, such as a guaranteed withdrawal rider or a death benefit; and
- The annuity is suitable as a whole, i.e. if an annuity in general is suitable, if this particular annuity is suitable, if the underlying sub accounts and riders are suitable.
You must reasonably inform the client of the features of the annuity, such as surrender charges, surrender charge period, tax implications, mortality and expense fees, investment advisory fees, limitations on interest returns, market risk, and all other insurance/investment components of the contract:
- When discussing "all other insurance/investment components of the contract," you should be clear that the interest your client earns may be subject to a negative Market Value Adjustment and under what circumstances.
- If your client has selected a guaranteed withdrawal rider, it is critical you explain how the guaranteed annual benefit amount can be reduced or even terminated and if there is an automatic increase to the benefit base, be sure your client understands this is not a cash bonus available for withdrawal.
- If your client has selected a cash bonus product, it is critical that you fully explain the vesting schedule with respect to any bonus amount credited to the contract and how it applies to both withdrawals and upon death.
The 2010 NAIC Model Suitability Regulation mandates producers evaluate the following minimum criteria:
- Annual Income
- Financial situation and need, including the source of premium for the annuity will not accept business if the source of the premium is from a home equity line of credit, a mortgage or reversed mortgage.
- Financial Experience
- Financial Objectives
- Intended Use of the Annuity
- Financial Time Horizon
- Existing assets
- Liquidity Needs and Liquid Net Worth – Note: You should carefully evaluate the liquid assets remaining AFTER the annuity purchase to determine if the remaining liquid assets are sufficient in the event a financial emergency.
- Risk Tolerance
- Tax status
- Other Products
We may ask for additional information that we feel is necessary to process a case. Although the minimum criteria that you must consider in your evaluations consists of the questions on the Annuity Suitability Questionnaire, you may ask for further information to make a suitability determination (subject to applicable state and federal laws).
All replacements must include an evaluation considering if what the client is losing offsets what the client is gaining in the new product and if the existing policy has been in force for less than 36 months (60 months for California and Minnesota). Some examples are:
- Evaluation of the surrender charge being paid
- New surrender charge schedule
- Loss of existing contract benefits such as a death benefit
- New fees
- New product enhancements, etc.
It is important to understand, document on the Annuity Suitability Questionnaire and explain to the client what advantage outweighs any disadvantage. For example, entering into a new surrender charge schedule is ALWAYS a disadvantage to a client. What is it about the client’s personal situation and/or the product that makes taking on a new surrender charge schedule reasonable?
Prior to solicitation, all producers must complete a four (4) hour continuing education (CE) Annuity Product training course from an approved vendor as well as detailed insurer-approved product-specific training.
2020 NAIC MODEL SUITABILITY REGULATION OVERVIEW
In states which have adopted the 2020 NAIC Model Suitability Regulation, all recommendations or sales must be in the best interest of the client. In addition to the requirements imposed by the 2010 Model Suitability Regulation, the 2020 Model Suitability Regulation requires the following:
- The client's interest must be prioritized.
- Recommendations and sales must effectively address the client's unique financial situation, insurance needs and financial objectives.
- Producers must meet specific "best interest" obligations regarding care, disclosure, conflict of interest and documentation.
The following is a summary of new producer responsibilities under the 2020 NAIC Model Suitability Regulation:
- Complete new training credits prior to any state deadline.
- Obtain a signed "Insurance Agent (Producer) Disclosure for Annuities" form at the time of recommendation or sale.
- Obtain additional signed forms if a client refuses to provide certain information or is making a purchasing decision against a producer’s recommendation.*
- Avoid and disclose any material conflict of interest.
- If requested by the client, disclose any cash and non-cash compensation in the form of a range or percentage.
- Communicate the basis or bases of any recommendation to the client and make a written record of any recommendation, the basis for the recommendation and any disclosures provided (including oral disclosures).
The following is some additional information regarding the new “best interest” obligations:
- Care. You must make reasonable efforts to obtain complete consumer profile information. In making a recommendation or sale, you must consider: (a) characteristics of the insurer, product costs, rates, and benefits; (b) if other products you are licensed to sell are more suitable; and (c) if the client would benefit from certain features of the annuity and the contract as a whole, such as annuitization, death or living benefits, subaccounts, riders or other insurance-related features.
Under the 2020 Model Suitability Regulation, in addition to the criteria required under the 2010 Model Suitability Regulation, minimum suitability criteria to be evaluated prior to making a recommendation or sale includes: (a) other annuity contracts held by the client; (b) the client’s willingness to accept nonguaranteed elements of annuity; and (c) the client’s debts and other obligations.
In the case of an exchange or replacement, you must take into consideration: (a) surrender charges, loss of benefits, increased fees or charges; (b) if the client will see a substantial benefit over the life of the product; and (c) if there has been more than one exchange or replacement within the preceding 60 months.
- Disclosure. Prior to recommendation or sale, you must disclose: (a) the scope/terms of the your relationship with the client and your role in the transaction; (b) the types of products you are authorized to sell; (c) the number of insurers you are authorized to sell products for; (d) how you are being compensated (commission or fee) and a notice of the client's right to request additional information; and (e) upon request by the client, the actual amount and frequency of cash compensation received for the sale (a range of amounts or percentages). At the time of recommendation or sale, you are required to obtain a signed “Insurance Agent (Producer) Disclosure for Annuities” form that is substantially similar to the form provided under the 2020 Model Suitability Regulation - Appendix A.
In addition to the above, you are still required to disclose the various features of the annuity to the client.
- Conflict of Interest. Producers are required to act without placing the producer’s or the insurer’s financial interest ahead of the client’s best interest. You must identify and avoid, or reasonably manage and disclose, material conflicts of interest (does not include compensation). You must disclose if you or any parent, subsidiary or affiliate of the producer have any material ownership interest in the insurer or any parent, subsidiary or affiliate of such insurer issuing the annuity contract.
- Documentation. At the time of recommendation or sale, you must make a written record of the recommendation being made and explain the basis for the recommendation. A signed statement must be obtained when a client fails to provide complete consumer profile information or is making a purchase not based on your recommendation.*
In states that have adopted the 2020 Model Suitability Regulation, producers are required to receive training on the new "best interest" obligations and requirements. If you have already completed the four (4) CE credit Annuity Product course, you’ll need to complete either a new four (4) CE credit course or an additional one-time, one (1) CE credit course from an approved vendor. You must complete required training prior to the state deadline. Producers must also continue to meet any carrier-specific product training requirements prior to solicitation.
*Nassau will not issue a contract if the Annuity Suitability Questionnaire is not completed or if the sale is not recommended by a producer.