The recent $1.3 million dollar settlement between Midland National Life Insurance Company (“Midland”) and the California Insurance Department – based upon Midland’s inappropriate sales practices in marketing annuities to seniors – is a strong indication that life insurance companies may need to re-examine the various regulations that were issued over the last several years related to annuity suitability. The Midland settlement came after a market conduct examination revealed that the company’s agents had engaged in improper sales and replacement transactions, particularly with senior citizens. In one case, a 75-year-old woman purchased an annuity for $91,000 with a 14-year surrender charge period, meaning that any full withdrawal of the value of the contract would be subject to some penalty until she reached 89 years old. Two years after she bought the annuity, she needed the funds and paid $27,000 in surrender charges.
Other life insurance companies have had similar issues regarding their annuity sales practices. For example, Allianz Life Insurance Company of North America agreed to pay $10 million to various regulators as part of a multi-state examination of their sales practices in 2012. As part of this settlement, where an annuity was found to have been unsuitable, Allianz had to offer owners the right to rescind the contract and receive a refund.
These types of sales practices were the target of the National Association of Insurance Commissioners (“NAIC”) Suitability in Annuity Transactions Model Regulation (“Model Suitability Regulation”) as well as the Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities (“Model Senior Designation Regulation”). The Model Suitability Regulation, which has been adopted by a number of states, requires insurers to establish procedures for supervising recommendations made by agents with respect to the sale of annuities and makes insurers responsible for the suitability review process. Insurers must inform consumers about the benefits and terms of annuity products, including the surrender charge period and the charges associated with surrender of the policy. Moreover, insurers are charged with reviewing all annuity recommendations made by their agents to confirm that the sale of the annuity is reasonable based upon certain factors such as age, net worth, tax status, purpose for purchase of the contract, source of funds, and liquidity needs. The Senior Designation Regulation is aimed at the use of titles such as “retirement planner” and “certified senior advisor,” which imply a certain expertise that may be misleading to older consumers. The regulation renders the use of these designations as an unfair trade practice if such designation implies that the agent has special training or knowledge in advising seniors in the purchase of annuity products.
Failure to adhere to these regulatory requirements can lead to enforcement actions such as what occurred with Midland and Allianz. As a result, life insurers should review their annuity suitability practices and procedures for compliance with state regulations and should continue to train and supervise their agents to ensure compliance with these mandates.