American National Insurance Company. Annuity Suitability. AMERICAN NATIONAL INSURANCE COMPANY One Moody Plaza, Galveston, Texas

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1 American National Insurance Company Annuity Suitability STANDARD & Guidelines AMERICAN NATIONAL INSURANCE COMPANY One Moody Plaza, Galveston, Texas

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3 American National Insurance Company 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; and Financial situation. Reasonable Effort to Obtain Relevant Information - Prior to the purchase or exchange of an annuity resulting from a recommendation an insurance producer shall make reasonable efforts to obtain information from the consumer concerning their: Financial status, Tax status, Investment objectives, and Such other information used or considered reasonable by the insurance producer, in making recommendations to a consumer. No Obligation to Consumer When - An insurance producer does not have an obligation if a consumer: Refuses to provide relevant information that is requested, Enters into an insurance transaction that is not based on a recommendation of the insurance producer, or Fails to provide complete or accurate information. In order to rely on this provision the producer must have made reasonable efforts to obtain the required information. This would include explaining to the consumer why the information is important and needed by the producer.

4 Accountable for Actual Knowledge of Consumer s Situation - An insurance producer s recommendation shall be reasonable under all the 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 recommendations 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. 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.

5 Annuity Suitability Guidelines Why a Suitability Standard The National Association of Insurance Commissioners (NAIC) has addressed the suitability of annuity sales through the introduction of the Suitability in Annuity Transaction Model Regulation ( Suitability Model Regulation ) which has been adopted or proposed in over 30 states as of April 1, 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. As a member of the Insurance Marketplace Standards Association (IMSA), American National Insurance Company ( American National or we ) requires that the standards of the Suitability Model Regulation be applied to applicants regardless of age in all jurisdictions. What s Required American National requires that 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.

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 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 should 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.

7 Financial Profile: Financial Information A producer should ask a consumer/applicant questions concerning his or her: Approximate gross annual income Estimated net worth (excluding primary residence, furnishings, automobiles) Liquid net worth Currently-owned investments Currently-owned life insurance and annuities 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: 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.

8 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 ½. 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. 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 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 questions: Is there a surrender charge and/or tax consequence associated with the replacement transaction? If there is a surrender charge or tax consequence associated with the replacement, how does the benefit of the replacement justify these consequences? What are the existing product features (including costs) or benefits not included in the new annuity contract?

9 What are the new annuity contract features (including costs) or benefits not available in the existing product? Is the consumer taking interest income, required minimum distribution, or other distributions from the existing account/product? If so, how will this be addressed with the new annuity contract? Does the consumer currently have full access to his or her money without penalty in his or her existing account/product/contract? If so, are the free withdrawal and annuitization provisions of the new annuity contract adequate relative to the consumer s cash needs and other assets available? Has the producer made the consumer fully aware of the comparison results gathered by the above questions in the suitability review? Marketing to Seniors The Basics Annuity sales to seniors have never had more regulatory attention than they do today. 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 consumer s age, life stage and liquidity needs. Things to consider include but are not limited to: Is the consumer currently employed? If so, how much longer does he or she plan to work? Is the consumer living on a fixed income or anticipate doing so in the future? When in the future? What are the consumer s primary expenses? Does the consumer still have a mortgage? How much income does the consumer need to meet fixed or anticipated expenses? Does the consumer appear to be in relatively good health? Does the consumer have access to liquid assets (not including the funds being used to purchase the annuity) to meet unanticipated or emergency expenses?

10 Healthcare Issues 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 consumer have? Does the consumer have access to adequate emergency funds for unanticipated or emergency health care needs, besides the assets being placed into the annuity? Will the consumer be relying on the assets placed in the annuity for anticipated and unanticipated heath costs? If the answer to the previous question is yes, does the consumer understand the effect surrender charges might have on the ability to meet sudden health care needs? Is there a reasonable belief that the consumer will not need the funds (being used to purchase the annuity) immediately for health care needs? Does the consumer exhibit any signs of diminished mental capacity? Is there reason to believe that the consumer 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 consumer? Maintaining Good Records 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.

11 Definitions of Terms Consumer means a person who purchases or considers purchasing an annuity based on a recommendation from a producer. Recommendation means advice provided by a producer to a consumer that results in an annuity transaction in accordance with that advice. Replacement means a new policy or annuity contract is purchased and, in connection with the sale, a consumer discontinues making premium payments on the existing policy or annuity contract, or an existing policy or annuity contract is surrendered, forfeited, assigned to the replacing insurer, or otherwise terminated or used in a financed purchase. Suitability means the determination of whether a specific annuity is appropriate for an individual, based on factors such as his or her age, financial and tax status, and desired financial goals and objectives. Surrender Charge means a charge that is usually a percentage of the value of the annuity contract or of premiums paid. The percentage may be reduced or eliminated after the annuity contract has been in force for a certain number of years. Sometimes the charge is a reduction in the interest rate credited.

12 Independent Marketing Group (IMG) is a division of American National Insurance Company. AMERICAN NATIONAL INSURANCE COMPANY One Moody Plaza, Galveston, Texas Form /08

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