Good investment practices and, now, state regulations and insurance companies have agents and representatives who recommend the purchase or exchange of an annuity support that the transaction is in the purchaser’s interest and is appropriate for the purchaser’s financial needs and goals. As part of this process, insurance companies have ‘Suitability Questions, Worksheets, and/or Acknowledgment Forms’ to be included with applications. Following are some GENERAL guidelines based on discussions with many of the insurance companies – please remember, one insurance company’s suitability information request may differ from that of another, and may or may not be the same as the following commentary. Also, if you have oversight by a broker/dealer or other supervising entity, an insurance company’s suitability requirement does not supersede or replace any other suitability requirements you are obligated to follow.
Topics for Suitability: Some discussion points you should have with your client:
- Financial status, net worth and current assets, including any existing annuity or life insurance.
- Annual income.
- Tax status.
- Risk tolerance.
- Investment objectives.
- Current and future monthly financial needs.
- Anticipated need to access cash values in the near future – versus the annuity’s surrender charge schedule and IRS pre-age 59 ½ tax penalty, if applicable.
Net Worth Calculation: Net Worth equals total assets minus liabilities (debts).
This calculation excludes primary residence, household contents, clothing, vehicles and other personal items. If the client owns a business, include the net worth of the business.
Liquid Assets include:
- Checking, savings, money market accounts, CDs
- Pension and profit sharing vested amounts, 401(k), 403(b), IRA, mutual funds, non-private publicly-traded stocks and bonds.
Illiquid Assets include:
- Investment or Rental property value
- Existing deferred annuities (not being transferred or exchanged)
- Planned premium for this Annuity purchase.
- Investment or Rental property mortgage amount
- Credit card debt
- Loans, private or commercial (examples: primary residence mortgage, automobile, student, signature and co-signature)
A Primary Residence is excluded in the net worth calculation since it is considered not liquid for annuity suitability.
What percentage of net worth would be acceptable for an annuity purchase?
In general, any time 50% or more of net worth is in annuities, some companies will not accept an application; others will further review in relation to:
- Age: As the client’s age increases, insurance companies expect the percentage of net worth invested in deferred annuities to decrease.
- Amount of net worth: The lower the amount of net worth, the lower the percentage of net worth that should be allocated to deferred annuities.
What circumstances will trigger further suitability review?
- The client is a senior (age 65 or over) with low or limited net worth.
- There is little in liquid assets set aside for emergencies [generally, a person should maintain an amount of liquid net worth equal to 3 to 6 months of their monthly living expenses].
- Indicated income without accessing the proposed deferred annuity is insufficient for indicated expenses.
- The pending premium for proposed deferred annuity plus other annuity values are equal to or greater than 50% of the client’s total net worth.
- The benefit for the client to transfer funds to the proposed deferred annuity is unclear from the information provided.
What circumstances may cause an insurance company to not accept an application?
- A client will incur a net loss in account value as a result of the proposed transfer/1035 exchange.
- A client is left with no liquid assets set aside for emergencies.
- A significant amount or all of a client’s net worth is in annuities with surrender charges.
- The client answers “NO” to statements or questions such as:
- They believe the product is suitable for them.
- They have sufficient liquid funds available for living expenses, health care, emergencies, and additional needs other than the money they plan to use to purchase this annuity.
- They understand that withdrawals greater than penalty-free amounts will incur surrender charges.
- If tax deferral is a financial objective or tax savings a financial purpose,
- that the tax deferred accrual feature of an IRA exists on its own and is not enhanced by the tax deferred accrual feature of this annuity, and
- that withdrawals from this annuity to satisfy the minimum distribution requirements of an IRA will be subject to surrender charges if the withdrawal is in excess of the penalty-free amount.
- They do not expect their monthly household income to significantly decrease during the term of the proposed annuity policy.
- They understand that, upon full surrender of the policy, surrender charges may reduce the value received below the original premium deposited.
- The agent has explained how the existing and new annuity policies compare on charges, rates, and other benefits.
- The agent reviewed their financials before recommending an annuity.
Whose information should be used for suitability determination?
- If the Owner is not the Annuitant, complete the suitability based on the owner’s information – i.e. the person paying the premium on the policy.
- If the Owner is a Trust, complete the suitability on the Grantor of the Trust, who should be the Annuitant; if the original grantor is deceased, then complete based on the Annuitant’s information.
- If the Owner is a Corporation, complete the suitability based on the corporation’s financial information.
As with any suitability determination, the client’s overall individual circumstances will be important. Should you have any questions regarding an annuity and the insurance company’s suitability requirements, please contact Imeriti, 800-921-3100.