Annuity Illustrations
Annuity Marketing, Sales Ideas, Suitability, and Issues by Michael J. Prestwich

You may have heard that SEC Rule 151(a) will be dead if the Finance Reform Bill is signed by President Obama. This is because the Conference Committee bill passed by the joint House-Senate conferees on June 25, 2010 included language proposed by Senator Tom Harkin (D-IA) to leave fixed indexed annuities under state supervision. The Finance Reform Bill also will make the 2010 NAIC Suitability in Annuity Transactions Model Regulation the law in all 50 states.

 

The fight against fixed indexed annuities is far from being over, however.  Here are several articles that appeared in response to the Harkin Amendment:

·         Jane Bryant Quinn on CBS Money Watch wrote, Congress Sells Out Seniors: No SEC Regulation for Indexed Annuities (Be sure to read Sheryl J. Moore’s 32-point response to this article)

·         FINRA, the Financial Industry Regulatory Authority, posted an Investor Alert about indexed annuities

·         Senator Daniel Akaka (D-HI) said in hearings for S.A. 3920, “Deceptive sales practices have been found to be used in these products. An individual in Hawaii pushed equity index annuities to collect high commissions at the expense of senior investors. Those investors least able to effectively evaluate financial products need these federal protections, without question. And they’ve been suffering.” (see full article)

·         Kevin Keller, president of the Certified Financial Planner Board of Standards, said, “These are products that are ripe for abuse among the elderly. It’s important for consumers, especially the elderly, to have the protection of the SEC.” (see full article)

·         Barbara Roper, director of investor protection at the Consumer Federation of America, in her letter to Congress wrote, “If adopted, this amendment would open a gaping hole in investor protections without any assurance that the insurance regulation relied on in its place is adequate or effective.” (see full article)

·         Denise Voigt Crawford, the Texas Securities Commissioner and president of the North American Securities Administrators Association said in her letter to Congress, “It’s a hybrid product, so the questions in play here go beyond just equity-indexed annuities themselves and raise issues concerning who is going to regulate these hybrid instruments on a going forward basis.” (see letter to Congress)

 

The list of consumer groups and financial professionals who are against indexed annuities is endless.  What is their beef?  Here is a summary of the issues that I have found after reading numerous articles and following indexed annuities almost from their inception:

·         Deceptive and/or high pressure sales practices

·         High commissions

·         High / long surrender charges

·         Lack of disclosure

 

Most annuity producers and companies who market indexed annuities, especially those who are members of the National Association for Fixed Annuities (NAFA), have already adopted marketing methods and procedures that deal with the above concerns.  Passage of the provisions of the 2010 NAIC Suitability in Annuity Transactions Model Regulation opens producers and companies to fines, discipline, and civil action if they cannot prove that they adhered to these higher suitability standards.

 

In short, assuming the final provisions of the Finance Reform Bill remain intact and the law is signed by President Obama, those involved with the development, distribution, administration, and purchase of fixed indexed annuities finally won after a long fight.  This win comes with a price, however.  All the players in the fixed indexed annuity industry must strictly follow the provisions of the 2010 NAIC Suitability in Annuity Transactions Model Regulation or the enemies of indexed annuity products will continue their attack with more ferocity than ever before.

The AnnuityLawyers.com website claims, “Annuities fraud is one of the top kinds of investment fraud scam artists practice.”

I talked to an annuity producer who sold a million dollar indexed annuity to a seventy-year old man only to have the commission reversed nine months later. The man’s son, who had heard that annuities are “bad investments,” called a local attorney to get the his father’s money back. The attorney called the insurance company and accused the producer of the following wrongdoing:

·         He did not tell the customer about the $180,000 first year surrender charge

·         He claimed the policy had an 8% guaranteed interest rate

·         He encouraged his client to sell $1,000,000 in stocks to buy the annuity

·         He did not ask the client about his investments, income, or expenses, and did not explain how the annuity would fit into the client’s overall financial plan

The producer disputed all these representations, but had little documentation to prove it.  Because the producer had such a weak case, the insurance company had little choice but to settle. The $80,000 commission charge-back nearly put this producer out of business.

The 2010 NAIC Annuity Suitability Model Regulations, which will very likely be in effect in every state by the end of the year, will make it easier for financial lawyers to threaten companies and submarine your book of business. Here’s why:

Insurers are now responsible for the supervision, training and sales practices of their agents. These lawyers will claim that the annuity producer was inadequately trained and therefore the company is responsible for an unsuitable sale. Companies will have to prove that the annuity producer was trained, and that he used sales methods or techniques not approved by the company.

These lawyers may claim that the annuity producer did not gather enough information from the consumer. Companies will have to prove that prior to making an annuity recommendation, annuity producers obtained information about the consumer’s 12 areas of suitability:

·         Age

·         Annual income

·         Financial situation and needs, including the financial resources used for the funding of the annuity

·         Financial experience

·         Financial objectives

·         Intended use of the annuity

·         Financial time horizon

·         Existing assets, including investment and life insurance holdings

·         Liquidity needs

·         Liquid net worth

·         Risk tolerance

·         Tax status

These lawyers may try to demonstrate that the annuity producer did not fully inform the consumer about all the ramifications of owning the annuity product. Companies will have to be able to prove that the annuity producer informed the consumer of:

·         the features of the annuity

·         the potential surrender period and surrender charge

·         potential tax penalty if the consumer sells, exchanges, surrenders or annuitizes the annuity

·         mortality and expense fees

·         investment advisory fees

·         charges for and features of riders

·         limitations on interest returns

·         insurance and investment components

·         market risk

The 2010 NAIC Annuity Suitability Model Regulations require companies to set up a special suitability approval department, similar to a life insurance underwriting department, which will examine each sale to ensure that the agent used suitable methods and sales practices. The purpose of this department is to gather information and to determine whether the annuity sale could be defended against those who may try to attack it.

Since it is now clear that the insurance company is always responsible for the product issued, they are now putting in place systems, standards, and training to protect their business. In the future an annuity sale will resemble a life insurance sale in that customers will have to qualify before their annuity application will be accepted. Annuity producers who are not willing or able to provide the necessary documentation to defend the fixed annuity industry against lawyers such as those listed in AnnuityLawyers.com, will find many of their annuity applications denied by the company, and may ultimately be forced out of the fixed annuity business.

Here is what you can do to succeed in today’s litigious environment:

·         Join and NAFA and learn about product suitability, advertising guidelines, and to educate yourself so you can represent yourself as an annuity professional.

·         Use software such as ImagiSOFT’s DataNet to prove that you have gathered information about the consumer’s 12 areas of suitability, disclosed the features of each annuity that you sold, and have documented every step of the sale.

·         Use company-approved advertising materials, illustrations, and disclosures.

·         Keep the recording of a five-minute summary interview with your client where you discuss the purpose of the annuity, the source of funds, the advantages of purchasing the annuity, the potential disadvantages such as surrender charges, the timeframe for the product, and the financial problem this product solves for your client.

·         Discuss the annuity with the beneficiaries. Explain probate, settlement options, and potential tax implications.

·         Let your customers know that you keep detailed records and to call you for a review if they have any questions about any of their annuity products.

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If you sell annuities you probably know on December 17, 2008, the SEC enacted Rule 151A that redefines the definition of the term “annuity contract” under the Securities Act of 1933. The primary target of this ruling is fixed indexed annuities, but many in the insurance industry believe that this rule may soon extend to all fixed annuities because of the SEC believes the rule extends to annuities “if the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract.”

 

ImagiSOFT, Inc. is sponsoring a promotion to help the National Association of Fixed Annuities (NAFA) fight this SEC rule. The heart of the SEC’s arguments center around suitable sales.  Through September 1, ImagiSOFT is offering a FREE two-year license to DataNet, a powerful software system to help you make higher quality annuity sales by following state suitability laws. Click this I Love Suitability link for details. This page gives an overview of state suitability law and how DataNet addresses these issues.  This page also explains how to get a lifetime free license to DataNet when you donate $250 or more to the NAFA Opposition Fund.

 

Lack of suitable annuity sales is the key argument that the SEC has used to defend their position why they should regulate fixed annuity sales instead of the states.  This argument has deep flaws. State suitability laws state that each agent should have a “system” to ensure that suitability laws are being followed, and that records must be kept (depending upon the state) from 3 to 10 years.  If you sell fixed annuities, make sure that you are not part of the problem — use a compliant “system” to follow state suitability laws, even if it is a thick, paper file.

 

Lastly, write a letter / email to your State Insurance Commissioner.  Tell them that you are following state suitability law, that you have a “system” to comply with the law, and that you believe that the state suitability law adequately protects consumers in your state.  Also write your State Representative and give him or her the same message, with the admonition to support the “Indexed Annuities and Insurance Products Act of 2009” recently introduced by Congressmen Greg Meeks (D-NY) and Tom Price (R-GA).  For more information see http://www.nafa151a.com/.

 

Please let your colleagues and associates know about ImagiSOFT’s free two year license to DataNet by sending them a link to this site.  The two-year free license offer ends September 1, 2009 so do this now.  The future of everyone who sells fixed annuities depends upon winning this fight!

I just got back from the NAFA Annuity Solutions Expo and my brain is swimming with ideas that I hope to find time to share. The short story: if you sell annuities and missed this event, you missed out. Changes are coming at lightening speed, and those who are unwilling to adapt to the new regulatory climate will probably not last long. Here is an outline of the agenda:

·         45 Sales Ideas in 45 Minutes – Bill Harris, President WVH Designs

·         What the States and FINRA are Doing – Jim Mumford, Iowa First Deputy Insurance Commissioner

·         New Marketing Standards – Don Walters, IMSA

·         New Rules for Prospecting & Advertising – Heather Gierstorf, American Equity

·         New Suitability Rules on Income Riders – Steve Phillips, Creative Marketing

·         Income Solutions for a Better Retirement – Brent Hamann, Milliman

·         Regulation 151(a) – NAFA Board

·         Partnering for  Suitability Success – Cindy Reed, NACOLAH; Megan Claypool, AVIVA, Kathy Baron, Sun Life; Mike Mullan, Financial Independence Group

·         Annuity Solutions for Income Security – Jonathan C. Illig

·         Issues and Recommendations for the Annuity Industry – Jim Poolman, former North Dakota Insurance Commissioner (person who wrote the NAIC Suitability Model Law)

·         Tax Strategies for Distribution Planning – Jim Williams, Lincoln Financial Group

·         Driving Sales with Technology – Mark Stone, Insurance Insight Group

·         Regulatory Trends & How they Will Change your Business – Danette Kennedy, Gorilla Marketing

As you probably know, there is a war going on right now between the National Association of Insurance Commissioners (NAIC) and the Securities and Exchange Commission (SEC). The SEC wants to control annuities by calling them “investments” as outlined in its Rule 151(a) proposal. Here are a few reasons why it may not pass:

·         Since most insurance commissioners want to keep their jobs, they have been enforcing the suitability and other laws like never before. The Wall Street Journal published an article that outlines recent actions by the Pennsylvania Insurance Department, including, Todd B. Garry, “Five-year license supervision for operating under a non-registered name and misrepresenting himself as an estate planner.”

·         NAFA has spent hundreds of thousands of dollars in attorney fees fighting Washington, distributing their position paper to the press (see National Underwriter), and advertizing in Money Magazine.

·         Agent Sales Journal has a forum to fight SEC Proposed Rule 151(a).

·         Many annuity marketing companies are fighting this proposal. If you have not let your voice be heard in Washington, do so now at sec151a.com.

If you have not done so already, I recommend that you join NAFA today. The annuity industry’s future is at stake. If you sell annuities for a living, I cannot think of a better way of voting with your checkbook.