Annuity Suitability Guidelines & Rules

Annuities can be beneficial insurance products and valuable tools for retirement income security.

However, annuities aren’t right for everyone. And not all types of annuities are appropriate for all consumers.

Suitability guidelines and standards require insurance companies, agents and brokers to ask questions and determine if an annuity is suitable for you.

These annuity regulations ensure there is a good match between your circumstances and the terms of your annuity contract.

Regulations require licensed brokers to make a reasonable effort to obtain details about your financial status, investment objectives and other information before recommending an annuity product.

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

To make this determination, insurers and agents collect information about your age, experience with investments, current financial situation and goals.

The National Association of Insurance Commissioners (NAIC) — the governing body that oversees insurance regulators in each state — 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 on June 23, 2022.

Since the model’s original adoption, standards have also been revised 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.

Insurers who fail to maintain procedures that detect unsuitable recommendations for the sale or exchange of annuities can face sanctions or penalties for noncompliance.

The model regulation also requires brokers and agents to undergo general annuity product training before attempting to sell you an annuity.

Suitability rules are in place to protect consumers like you.

Because broker dealers aren’t held to the same high fiduciary standard as financial advisors, it’s necessary to regulate agents and ward off unscrupulous practices.

These rules make it harder for bad actors to swindle clients or pressure them to buy annuities they can’t afford or don’t really need.

In February 2020, the NAIC approved revisions to its model, clarifying that “all recommendations by agents and insurers must be in the best interest of the consumer and that agents and carriers may not place their financial interest ahead of the consumers’ interest when making a recommendation,” according to the organization’s website.

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

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

Reviewing these details also ensures insurers and brokers won’t sell you an annuity if doing so could cause you significant financial hardship.

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.

After reviewing your suitability information, an insurer may determine 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 forbid insurance companies from sharing or selling your personal information to a non-affiliated third party without your consent.

You will be required to complete an annuity suitability questionnaire before you can purchase an annuity.

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

Annuity suitability questionnaires usually range from one to two pages.

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

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.