American National Insurance Company. Annuity Suitability Standard & Guidelines. (June 18, 2012)

Transcription

1 American National Insurance Company Annuity Suitability Standard & Guidelines (June 18, 2012) of 11 06/12

2 Annuity Suitability Standard American National s Producers are required to comply with this standard in all states where American National transacts business regardless of whether the state where the transaction is entered into has adopted an annuity suitability law. The suitability standard applies regardless of the age of the consumer. The annuity suitability standard that American National s producers must follow is as follows: Reasonable Belief of Suitability In recommending to a consumer the purchase of or the exchange of an annuity the producer shall have reasonable grounds for believing that the recommendation is suitable on the basis of facts disclosed by the consumer as to their: Investments Other insurance products Financial situation and needs, including suitability information as listed below The producer must have a reasonable basis to believe the following: The consumer has been informed of the various features of the annuity, including surrender period and surrender charges, and fees and expenses The consumer would benefit from certain features of the annuity The annuity as a whole, or in the case of a replacement, the transaction as a whole is suitable for the particular consumer based on his or her suitability information. In the case of a replacement, the transaction is suitable taking into consideration whether the consumer will incur a surrender charge, be subject to the commencement of a new surrender period, lose existing benefits or be subject to increased fees (including charges for riders); whether the consumer will benefit from the product enhancements and improvements of the new annuity contract; and whether the consumer has had another annuity replacement within the preceding 36 months or 3 years (60 months or 5 years in California) Reasonable Effort to Obtain Consumer Suitability Information Prior to the purchase or exchange of an annuity resulting from a recommendation an insurance producer shall make reasonable efforts to obtain the following consumer suitability information: Age Annual Income of 11 06/12

3 Financial Situation and Needs (including the financial resources used for funding the annuity) Financial Experience Financial Objectives Intended Use of the Annuity Financial Time Horizon Existing Assets (including investments and life insurance holdings) Liquidity Needs Liquid Net Worth Risk Tolerance Tax Status No Obligation to Consumer When An insurance producer does not have an obligation if a consumer: Provides materially inaccurate information, Refuses to provide relevant suitability information and the annuity transaction is not recommended, or Enters into an insurance transaction that is not based on a recommendation of the insurance producer. In order to rely on this provision the producer must have made reasonable efforts to obtain the required suitability information. This would include explaining to the consumer why the information is important and needed by the producer. Accountable for Actual Knowledge of Consumer s Situation An insurance producer s recommendation shall be reasonable under all circumstances actually known to the producer at the time of the recommendation. Maintain Records Insurance producers shall maintain records of the information collected from the consumer and other information used in making a recommendation that were the basis for the annuity transaction for five years unless state law requires a longer period of time. Records may be maintained in paper or any electronic media that accurately reproduces the actual document of 11 06/12

4 Cooperation with American National American National, under the annuity suitability standard, is required to assure that a system to supervise producer recommendations exists. This system of supervision shall include but not be limited to having written procedures and conducting periodic reviews of company and producer records reasonably designed to detect and prevent violations of the annuity suitability standard. Thank you for your cooperation in helping American National comply with this annuity suitability standard of 11 06/12

5 Why a Suitability Standard The National Association of Insurance Commissioners (NAIC) addressed the suitability of annuity sales through the introduction of the Suitability in Annuity Transaction Model Regulation ( Suitability Model Regulation ) in 2006 and an earlier version in 2004 for senior protection. The NAIC substantially revised the Suitability Model Regulation in the spring of As of March 1, 2012, 47 states have adopted a version of the Suitability Model Regulation, and an additional state has suitability standards not based on a version of the Suitability Model Regulation. While the Suitability Model Regulation applies to both fixed and variable annuities, compliance with the current FINRA rules pertaining to suitability satisfy the requirements of the regulation with respect to variable annuities. What s Required American National requires that all of its producers, prior to making a recommendation for the purchase or exchange of any American National annuity, make a reasonable effort to obtain relevant information from the consumer regarding his or her insurance needs and financial objectives. All recommendations for the purchase or exchange of an American National annuity should be suitable for the consumer based on information known by the producer at the time the recommendation to purchase or exchange an annuity is made. Which Annuity Products These guidelines are applicable to all annuities, fixed, indexed and variable. Under selling agreements we enter into with third-party broker/dealers, we rely on third-party broker/dealers to determine the suitability of an American National variable annuity sold by a registered representative, consistent with FINRA rules. Further, we rely on the third-party broker/dealers to supervise their registered representatives in the sale of any American National variable annuity, consistent with supervision obligations of FINRA rules. How to Comply In order to assist producers selling annuities, American National has developed a fixed annuity suitability form. All clients must complete and sign the suitability form at the time the annuity application is written for either a traditional fixed annuity or an indexed annuity. These guidelines provide assistance for understanding the suitability requirement and completing the annuity suitability form. These guidelines use certain terms that are defined. Please see the definition section of 11 06/12

6 Suitability and the Producer All recommendations for the purchase or exchange of an annuity product should be suitable for the consumer based on information known by the producer at the time the recommendation is made. Prior to making a recommendation for the purchase or exchange of an annuity product, the producer should make a reasonable effort to obtain relevant information from the consumer regarding his or her insurance needs and financial objectives. Questions to Ask No set of questions can replace the use of good judgment by the producer. However, the following questions may assist the producer in determining if the purchase or exchange of an annuity is suitable for the consumer. What is the consumer s main financial objective or concern with his or her current financial position? Why isn t the consumer s current financial plan meeting his or her insurance and financial needs and objectives? How will the purchase of an annuity help the consumer meet his or her insurance needs and financial objectives? After the purchase of an annuity, will the consumer have sufficient liquid assets to meet monthly living expenses and reasonably anticipated emergencies? If the consumer were a close friend or a relative with like insurance needs and financial objectives, would you agree that the recommendation is suitable? Gathering the Details Personal Information A producer must gather basic information from the consumer/applicant, including: owner s name, owner s social security number, owner s date of birth, owner s age, and owner s occupation. Financial Profile: Financial Information A producer must ask a consumer/applicant questions concerning his or her: approximate gross annual income; estimated net worth (excluding primary residence, furnishings, automobiles); liquid net worth; liquidity needs; financial situation and needs, including the financial resources used for the funding the annuity; financial experience; financial objectives; intended use of the annuity; financial time horizon; existing assets, including currently-owned life insurance and annuities; risk tolerance and tax status of 11 06/12

7 The answers to these questions will aid the producer and the consumer/applicant in exploring the consumer s need for the annuity. It may also assist the producer in identifying other assets that should be considered in developing a recommendation. Goals and Objectives A producer should assist the consumer in documenting his or her financial goals and objectives. This includes such issues as retirement planning, education for children, gifts or donations, long term health care and anything else that might assist the consumer in itemizing major plans for the future. Before recommending an annuity for purchase, the producer should review the current financial situation to determine if the product being proposed will help the consumer attain those goals and objectives. Items to consider: Financial Time Horizon Annuities are designed to be long-term savings instruments. Is the annuity appropriate, given the goals and objectives of the consumer? Liquidity Needs Are the free withdrawal and annuitization provisions of the annuity adequate relative to the consumer s needs and other assets available? Risk Tolerance Although fixed and equity-indexed annuities both protect principal and credited interest from market risk, future interest rates earned could be higher or lower than current rates. Does the consumer understand and accept the volatility of future interest earned? With regard to variable annuities, does the consumer understand and accept the volatility of the market and that the annuity value may fluctuate and be worth more or less than the premiums paid to purchase the variable annuity? Other Considerations The producer should not assume the consumer understands annuities. In addition to presenting up-to-date information about the specific annuity recommended, the producer needs to review the following with the consumer: Fixed annuity principal and credited interest are protected from market loss and backed by the full faith and credit of the insurance company. Tax-deferred is not tax-free; earnings from an annuity are taxable upon withdrawal as ordinary income. If it is a qualified annuity, income taxes may be due on the whole amount. The producer should explain the 10% IRS penalty tax that will have to be paid for distributions made prior to the age of 59 1/2. The penalty tax is applicable to interest earned for nonqualified annuities. For qualified annuities, the penalty tax may apply to the entire value of the annuity. If the annuity is purchased in a retirement plan, the producer should state that an annuity in a qualified retirement plan does not provide additional tax benefits. Discussing the nontax benefits of an annuity is critical of 11 06/12

8 When talking about indexed annuities, the producer should not say there is no risk or no risk of loss. Indexed-annuity risks include missing potential index gains due to interest crediting limits, only earning the minimum-guaranteed return and paying penalties that can eat into the principal if the annuity is surrendered early. The producer should review and sign the Annuity Disclosure Form with the consumer. The producer should explain how the surrender charges are calculated and when they come into play, and mention the various annuitization options available. The producer should also explain the free-look provision. Replacement/Exchanges If the recommendation involves the replacement of another annuity contract or life insurance product, or the movement from another financial instrument, the producer should also consider the following topics and questions: Surrender Charge Periods &Percentages What is the amount of the surrender charge for the new annuity contract? How many years are left in the surrender charge period of the current contract? Will the surrender charge period of the new annuity contract be a longer period of time? Will the amount or percentage (%) of the surrender charges be greater in the new annuity contract? Minimum Guaranteed Non-Forfeiture Interest Rates What is the Minimum Guaranteed Non-Forfeiture Interest Rate of the current annuity contract? What is the Minimum Guaranteed Non-Forfeiture Interest Rate of the new annuity contract? How do current interest rates of the two annuities compare? Access Features Is the client taking interest income, required minimum distribution, or other distributions from the existing contract? If so, how will this be addressed with the new annuity contract? Does the client currently have partial access to his or her money without a charge in the existing contract? Are the surrender-charge free withdrawal and annuitization provisions of the new annuity contract adequate relative to the client s cash needs and other assets available? of 11 06/12

9 Premium Enhancements/Bonus Does the new annuity contract offer a premium enhancement or bonus interest? Will the client be charged for the bonus or premium enhancement with either higher surrender charges or longer surrender charge periods? Is the bonus or premium enhancement subject to recapture or forfeiture if the client prematurely surrenders the new annuity contract? How many years must the annuity be kept to fully earn the premium enhancement or bonus? Tax Consequences Are there any tax consequences associated with the replacement transaction? Do the benefits of the replacement justify any tax consequences? Product Features What are the product features or benefits (including costs) of the contract that will be replaced? What are the contract features or benefits (including costs) of the new annuity contract? How do the contract features, benefits and costs compare? Discuss the comparison of the two products with your client. Ask yourself this question: Would a reasonable person believe this replacement/exchange is necessary? Special Note Regarding California Residents age 65 and older: If a California resident is age 65 or older and the recommendation to purchase an annuity involves the replacement of an existing annuity contract that requires the consumer to pay a surrender charge, the producer must be able to demonstrate that the replacement transaction confers a substantial financial benefit over the life of the policy to the consumer. This legal standard is very high and difficult to prove. American National recommends that producers not replace or exchange an annuity for a California resident age 65 or older if a surrender charge will be incurred. Sales to Seniors Annuity sales to seniors have never had more regulatory attention than they do today. Seniors can be more vulnerable due to isolation, physical and mental disabilities and dependence on others for care and assistance. Because of this, a producer should take extra time and care before recommending that a senior purchase an annuity. A producer should make reasonable efforts to obtain information about the person s age, life stage and liquidity needs. Things to consider include but are not limited to: of 11 06/12

10 Is the senior currently employed? If so, how much longer does he or she plan to work? Is the senior living on a fixed income or anticipate doing so in the future? When in the future? What are the senior s primary expenses? Does the senior still have a mortgage? How much income does the senior need to meet fixed or anticipated expenses? Does the senior appear to be in relatively good health? Does the senior have access to liquid assets (not including the funds being used to purchase the annuity) to meet unanticipated or emergency expenses? Among other things, senior healthcare issues can emerge quickly and may require significant funding. Additional questions to consider regarding healthcare issues: What health care insurance does the senior have? Does the senior have access to adequate emergency funds for unanticipated or emergency health care needs, besides the assets being placed into the annuity? Will the senior be relying on the assets placed in the annuity for anticipated and unanticipated health costs? If the answer to the previous question is yes, does the senior understand the affect surrender charges might have on the ability to meet sudden health care needs? Is there a reasonable belief that the senior will not need the funds (being used to purchase the annuity) immediately for health care needs? Does the senior exhibit any signs of diminished mental capacity? Possible signs of diminished mental capacity could include one or more of the following: o Senior looks abandoned or neglected o Noticeable changes in the senior s grooming or appearance o Senior seems disorientated, dazed, nervous or fearful o Senior asks same question(s) over and over o Senior does not remember having requested any insurance transaction Is there reason to believe that the senior s financial affairs might be under the control of someone else, such as someone who has a power of attorney, conservatorship or guardianship over the senior? If you suspect that the senior has diminished mental capacity try to get the senior to include a trusted friend or family member to witness the transaction and sign the suitability form. If you are unable to secure an appropriate witness and you are uncomfortable with the situation, you should consider stopping the sales presentation. Reverse Mortgages A reverse mortgage is an interest-bearing loan that is secured by the equity that an owner has in his/her home. Most lenders require that the owner and any co-borrower be 62 years old or older to qualify for a reverse mortgage. Unlike other home loans, homeowners do not make interest or principal payments during the life of the loan. The of 11 06/12

11 interest is added to the principal. The reverse mortgage is typically payable when the homeowner dies, sells the home, or moves. The reverse mortgage loan and any interest owed must be repaid either by the owner or the owner s heirs. Generally, the home will be sold, and the loan (including interest) will be paid back from the proceeds of the sale. If home values have fallen, or if the owner lives longer than expected, then the owner may owe more than the home is worth. Interest rates, fees, and costs associated with reverse mortgages are often significantly higher than other types of loans. After a reverse mortgage has been taken, the homeowner is still responsible for property taxes, insurance and other home costs such as repairs and maintenance. For purposes of conducting a proper suitability analysis, funds from a reverse mortgage should not be included in a consumer s estimated net worth or liquid net worth. Funds from a reverse mortgage generally should not be used to purchase an annuity. Other compelling factors must be present that you have documented if a California resident is purchasing the annuity and a reverse mortgage exists on the primary residence, Recordkeeping Obligations The annuity suitability form and any other documentation that the producer prepared or used in evaluating suitability and making a recommendation to purchase or exchange an annuity must be maintained in the producer s client file for a minimum of 5 years in most states and up to 10 years in certain states, after the consumer completes the recommended transaction. We strongly recommend that a producer retain all suitability information in his or her client file for as long as the contract remains in force (regardless of any shorter period a state may specify). Records documenting the suitability of each of your annuity sales must be made available to regulators and American National compliance personnel when requested of 11 06/12