Annuity Suitability Guidelines & Rules

What Are Suitability Guidelines for Annuities?

Annuity suitability guidelines and standards help ensure the recommended annuity is a good match to help the consumer reach their financial goals. The guidelines require annuity insurers and agents to consider factors like the consumer’s income, age, assets and liquidity needs before recommending an annuity. 

Regulations require insurers and agents to make a reasonable effort to ask questions about your financial status, investment objectives and other information. Under these guidelines, annuity issuers cannot issue an annuity recommendation unless there’s a reasonable basis to believe the annuity would effectively address the consumer’s financial needs. 

Annuity issuers must undergo the same due diligence when recommending annuity features such as annuitization and riders.

Not all types of annuities are appropriate for all consumers. Annuity regulations keep you from purchasing a financial product that would work against a well-rounded retirement plan. 

It’s important to provide accurate and complete information on your annuity application to include for the suitability questionnaire. Your insurer is required to use that information in assessing the recommendations they make.

Brandon Renfro, Ph.D., CFP®, RICP®, EACo-Owner of Belonging Wealth Management

As a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.

NAIC Suitability in Annuity Transactions Model Regulation

The National Association of Insurance Commissioners (NAIC) oversees insurance regulators in each state and established a model regulation for annuity suitability in 2003. The organization later revised the model with even stronger protections in 2010 and 2020. The NAIC has a detailed summary of their Annuity Suitability & Best Interest Standard Rules available, which was most recently updated in November 2023.

Standards have also been revised since the model’s original adoption to align with standards set forth by the Financial Industry Regulatory Authority (FINRA).

NAIC’s suitability model serves as a template for laws and rules adopted by each state. However, states can adopt even stricter provisions if they choose. 

The model regulation also requires brokers and agents to undergo general annuity product training before attempting to sell you an annuity. Most states require insurers to complete a 4-hour training course approved by the department of insurance. 

What Information Is Gathered?

Based on the NAIC regulation, there are 12 pieces of personal information an insurer or broker must consider before recommending an annuity.

Suitability Information Gathered by an Insurer

1. Age
2. Annual income
3. Financial situation and needs, including the financial resources used to fund the annuity
4. Financial experience
5. Financial goals and objectives
6. Intended use of the annuity
7. Financial time horizon
8. Existing assets, including investments and life insurance policies
9. Liquidity needs
10. Liquid net worth
11. Risk tolerance
12. Tax status

Source: NAIC

Gathering this information allows you to see how purchasing an annuity fits into your current and future finances.

How Do Insurance Companies Use This Information?

Insurers use your information to ensure compliance with the NAIC model and other state regulations.

A broker, agent or insurer must believe you’ve been informed of all the features and potential consequences of purchasing your annuity.

Prior to or at the time of the sale, you should be informed about:

• The potential surrender period and any surrender charges.
• Potential tax penalties if you sell, exchange, surrender or annuitize your annuity.
• Mortality and expense fees.
• Investment advisory fees and any annual fees.
• Cost and features of riders or other add-on annuity options.
• Limitations on interest returns.
• Insurance and investment components.
• Market risk.

Source: NAIC 

After reviewing your suitability information, an insurer may decide an annuity isn’t right for you. If that’s the case, the insurance company will contact your agent and usually notify you in writing.

Insurers are required to keep your information on file to show compliance in case they are audited.

However, NAIC regulations don’t allow insurance companies to share your personal information with a nonaffiliated third party without your consent.

Annuity Suitability Process and Sample Questionnaire

You will be required to complete an annuity suitability questionnaire before you can purchase an annuity, and they usually range from one to two pages.

Suitability questionnaires typically include a page of defined terms you can reference when completing the paperwork.

Questionnaires vary by state, but each form must address the 12 key pieces of information from the list above. 

Examples of Annuity Suitability Questions 

• What are your financial objectives in purchasing this annuity?
• Do you expect to take any lump sum payments out of this annuity that will incur a penalty?
• How would you describe your general risk tolerance?
• What is the source of premium for this annuity?
• Have you or any proposed owner, annuitant or covered person been diagnosed with a terminal illness? 

Source: NASSAU 

If you refuse to provide information on a suitability form, you essentially waive consumer protections granted to you under state law.

If you don’t provide this information, some questionnaires require you to check a box acknowledging that you take full responsibility for determining whether the proposed annuity is suitable for you or not.

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