The 2010 NAIC Model Law
on Suitability in Annuity Transactions
We are required to inform agents of the requirements in the 2010 NAIC Model Law on Suitability in Annuity Transactions (“2010 Model Law”) in states where it has been adopted. Below is a description of the 2010 Model Law. State variations may either be noted here, they may be built directly in to the Suitability Questionnaire, or they may be integrated into our internal policies and procedures, depending on the type of variation.1
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:
- 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 consumer will benefit from certain features of the annuity, such as a guaranteed withdrawal rider or a death benefit;
- 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;
- The 2010 NAIC Model Law mandates producers evaluate the following 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 legal criteria that you must consider in your evaluations consists of the questions on the Annuity Suitability Questionnaire, you are not prohibited from asking or gathering further information to make a suitability determination providing there is no state or federal law prohibiting them from doing so.
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 and explain to the client what advantage on the Annuity Suitability Questionnaire 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?
The 2010 Model Law also contains other provisions concerning an insurer’s requirements that are not discussed here such as post issue monitoring of sales, record keeping, etc.
Nassau Re has partnered with an outside vendor, LIMRA PinPoint, to allow you to complete your state CE training. You may also complete your state CE course on any vendor site approved by your state. If you do complete your state CE training on a site other than LIMRA PinPoint, you will be asked to submit your Training Certification from that vendor to Nassau Re.