Clients are increasingly looking for ways to secure and supplement their post-retirement finances.
The good news for you as an annuity broker is that the long-term, secure nature of an annuity makes it uniquely situated to provide a valuable fourth option to the traditional sources of retirement income:
- Social Security,
- retirement plans and
- savings.
However, there’s also been an increase in regulation — “suitability rules” — and scrutiny of your sales practices.
Some state officials, organizations and consumers have voiced concern that not all annuity sales are suitable, given a client’s financial circumstances. One response to this concern is the NAIC’s development of the Senior Protection in Annuity Transactions Model Regulation (275-1). The stated purpose of this regulation is to “ensure that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed.”
To achieve this purpose the regulation places a duty on the broker to demonstrate that he/she has “reasonable grounds for believing that the recommendation is suitable” for a particular client, based on facts disclosed by the client “as to his or her investments and other insurance products and as to his or her financial situation and needs.” Many states have already adopted this model regulation.
So what is a suitable annuity sale, and what is the purpose of suitability regulation?
Generally speaking, something is suitable if it is appropriate to a purpose or an occasion. In the world of annuity sales, it can probably be identified by affirmatively answering the question:
Most adopted regulations identify types of information that the broker should obtain prior to the sale or exchange of an annuity. The list includes information concerning the client‘s
- financial status,
- tax status,
- investment objectives, and
- any other information “used or considered to be reasonable by the insurance producer” in making a recommendation.
There are protections for the broker — for example, if a client provides you with incorrect or incomplete information. Keep in mind, however, if a client does not want to discuss the appropriateness of an annuity, it’s likely advisable to tread carefully. As a client should be wary of a broker who is making a sales pitch before understanding his goals and needs, so should a broker be wary of a client who isn’t forthcoming about his goals and needs.
The flip side to your understanding the client’s background is the client’s understanding of the particular annuity being proposed — its product features, expenses, charges, etc.
Here are some examples of how a suitability analysis might play out:
- For that client who will need access to funds in the short-term:
- Does her time frame match up with the annuity being proposed?
- Does she understand there may be surrender charges if funds are withdrawn prior to the end of the surrender-charge period?
- Does she understand that the withdrawal could also trigger an IRS pre-age 59½ 10% tax penalty?
- For that client with an aversion to investment risk:
- Does his risk tolerance match up with the annuity being proposed?
- What is his investment acumen?
- Is he familiar with life insurance, annuities or other types of retirement or investment products?
- For that client who is saving for retirement:
- Does her goal match to the annuity being proposed?
- Does she already own an annuity?
- Does she need another one, or maybe a different one?
- Is her end goal a guaranteed income stream?
- For that client who is in retirement:
- Are his income requirements going to be met with the annuity being proposed?
- Does it make sense for 100% of his assets to be in a payout annuity?
- Will a deferred annuity make a good “parking spot” for funds?
