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Annuity suitability rules require insurers, broker dealers and agents to collect information about your financial situation to determine if an annuity meets your needs. The National Association of Insurance Commissioners created a model regulation for annuity suitability that most states follow.
What Are Suitability Guidelines for Annuities?
Annuities can be beneficial insurance products and valuable tools for retirement income security.
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.
- You will benefit from certain features of the annuity.
- The overall annuity and its underlying subaccounts are suitable for you.
To make this determination, insurers and agents collect information about your age, experience with investments, current financial situation and goals.
NAIC Suitability in Annuity Transactions Model Regulation
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.
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.
“This model regulation was adopted to set standards and procedures for suitable annuity recommendations and to require insurers to establish a system to supervise recommendations so that the insurance needs and financial objectives of consumers are appropriately addressed.”
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.
Why Are They Used?
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.
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.
- Annual income
- Financial situation and needs, including the financial resources you’re using to fund the annuity
- Financial experience
- Financial goals and objectives
- Intended use of the annuity
- Financial time horizon
- Existing assets, including investments and life insurance policies
- Liquidity needs
- Liquid net worth
- Risk tolerance
- Tax status
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.
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.
- 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.
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.
Annuity Suitability Process and Sample Questionnaire
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.
- Does your income cover all your living expenses including medical costs?
- Do you expect changes to your living expenses?
- Do you have an emergency fund for unexpected expenses?
- What are your financial objectives for this purchase?
- What other financial products do you own or have you previously owned?
- What is your federal tax bracket?
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.
4 Cited Research Articles
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- Florida Department of Financial Services. (n.d.). Annuity Suitability Questionnaire. Retrieved from https://www.myfloridacfo.com/division/agents/licensure/Forms/documents/DFS-H1-1980.pdf
- National Association of Insurance Commissioners. (2021, June 4). Annuity Suitability & Best Interest Standard. Retrieved from https://content.naic.org/cipr_topics/topic_annuity_suitability_best_interest_standard.htm
- National Association of Insurance Commissioners. (2020). Suitability in Annuity Transactions Model Regulation. Retrieved from https://content.naic.org/sites/default/files/inline-files/MDL-275.pdf
- National Association of Insurance Commissioners. (n.d.). Revised Suitability in Annuity Transactions Model Regulation. Retrieved from https://www.naic.org/documents/committees_a_suitability_reg_guidance.pdf