Chapter 24:

Annuity Suitability NEW SECTION

Annuity Suitability NEW SECTION

Life insurance policy Illustration: NEW SECTION

Life insurance policy Illustration: NEW SECTION

NEW SECTION DISCLOSURE

NEW SECTION DISCLOSURE

Duties of insurers:

Insurers must obtain the following with all life insurance applications. A statement, signed by the applicant, disclosing whether the new policy will replace an existing policy. A statement disclosing whether the agent knows replacement will be involved in the transaction.

True or false: Before beginning a life insurance sales presentation, agents must inform prospective purchasers that they are acting as agents for a particular insurance company.

True

The existing insurer is the insurer whose

policy is to be replaced

An insurance producer must not dissuade, or attempt to dissuade, a consumer from

: truthfully responding to an insurer's request for confirmation of suitability information; filing a complaint; or cooperating with the investigation of a complaint

Policy summaries must also list the following values:

Annual premium for the basic policy and each optional rider Guaranteed amount payable on death at the beginning of the policy year Total guaranteed cash surrender values at the end of the year Guaranteed endowment amounts payable under the policy (which are not included under guaranteed cash surrender values)

SECTION ONE: Replacement

SECTION ONE: Replacement

Annuity suitability Definition

Suitability information means information that is reasonably appropriate to determine the suitability of a recommendation, including the following: 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

Purpose of illustrations and scope:

Washington's life insurance policy illustration regulations protect consumers and foster consumer education by providing computerized illustration formats, standards to be followed when illustrations are used, and the disclosures that must accompany such spreadsheet illustrations. Limit footnotes and explain in an understandable and direct way. These rules apply to all group and individual life insurance policies and certificates except: variable life insurance; individual and group annuity contracts; credit life insurance; and life insurance policies with no illustrated death benefits on any individual exceeding $10,000.

Exceptions: The disclosure requirements apply to all life insurance transactions in Washington (including fraternal benefit societies) except:

annuities; credit life insurance; group life insurance; insurance policies issued in connection with pension welfare plans subject to the Employee Retirement Income Security Act of 1974 (ERISA); and variable life insurance under which the amount and duration of death benefits and cash values vary in accordance with values of investments held in a separate account.

What is a buyers guide?

is a document containing information designed to assist an insurance applicant when buying insurance. It contains information that has been recommended for use by the National Association of Insurance Commissioners (NAIC). A company must use the current Buyer's Guide no later than six months after approval by the National Association of Insurance Commissioners.

Conservation is any attempt by the existing insurer or producer to dissuade a policyholder from replacing

an existing insurance policy or annuity

A replacing insurer is the insurer proposing to

issue a new policy that is to replace an existing insurance polic

An insurer must: (suitability)

maintain reasonable procedures to inform its insurance producers of the requirements of this regulation and shall incorporate the requirements of this regulation into relevant insurance producer training manuals; establish standards for insurance producer product training and must maintain reasonable procedures to require its insurance producers to comply with the one-time, four-hour annuity continuing education requirement ; provide product-specific training and training materials, which explain all material features of its annuity products to its insurance producers; maintain procedures for review of each recommendation prior to issuance of an annuity, which are designed to ensure that there is a reasonable basis to determine that a recommendation is suitable; maintain reasonable procedures to detect recommendations that are not suitable; and annually provide a report to senior management, including to the senior manager responsible for audit functions, which details the review, with appropriate testing, reasonably designed to determine the effectiveness of the supervision system, the exceptions found, and corrective action taken or recommended, if any.

How long must insurers keep these documents on file?

Insurers must keep these documents on file for at least three years.

Purpose of Disclosure Washington's insurance solicitation regulations were created to

: require insurers to give life insurance purchasers information that will improve the buyer's ability to select the most appropriate life insurance plan for his needs; improve the buyer's understanding of the basic features of the policy; and improve the buyer's ability to evaluate the relative costs of similar life insurance plans.

An existing insurer or producer can make a conservation effort by giving the policyholder a

Policy Summary for the existing life insurance or a ledger statement containing policy data on the existing policy within 20 days of receiving the replacement material from the replacing insurer

Purpose of replacements:

The purpose of Washington's replacement regulations is to regulate the activities of insurers and agents with respect to the replacement of life insurance and annuities. Replacement of existing policies with new policies is not prohibited. However, the state requires that agents and insurance companies provide full information when replacement is involved so that policyowners can make decisions in their own best interest. The regulations were also created to reduce the opportunity for misrepresentation and incomplete disclosures and to establish penalties for failure to comply with these rules.

Replacement refers to any transaction in which new life insurance or a new annuity is to be purchased and the proposing producer or insurer (if there is no producer) knows that the transaction will cause existing life insurance or annuities to be:

lapsed, surrendered, forfeited, exchanged, or otherwise terminated; converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by the use of nonforfeiture benefits or other policy values ; amended to reduce benefits or term of coverage; reissued with a reduction in cash value; or pledged as collateral or subjected to borrowing (whether in a single loan or under a schedule of borrowing) for amounts in the aggregate exceeding 25% of the loan value of the policy.

If a producer uses a basic illustration during a life insurance sales presentation, the producer must give a

signed copy of the illustration to the insurer and to the applicant. If applicable, a signed revised illustration must be given by the time of policy delivery if the originally illustrated policy was not issued.

Insurers and producers must have reasonable grounds to believe the following is know when recommending a purchase or echange of annuity

The consumer has been reasonably informed of various features of the annuity, such as 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, potential charges for and features of riders, limitations on interest returns, insurance and investment components, and market risk. The consumer would benefit from certain features of the annuity, such as tax-deferred growth, annuitization, or death or living benefit. The particular annuity as a whole, the underlying subaccounts to which funds are allocated at the time of purchase or exchange of the annuity, and riders and similar product enhancements, if any, are suitable (and in the case of an exchange or replacement, the transaction as a whole is suitable) for the particular consumer based on her suitability information.

When a policy is to be replaced, the replacing insurer must:

send each existing insurer a written communication advising of the replacement within three working days of receiving the application; require from the insurance producer with the application for life insurance or annuity a list of all of the applicant's existing life insurance or annuities to be replaced and a copy of the replacement notice provided the applicant (such existing life insurance or annuity shall be identified by name of insurer, insured, and contract number); maintain evidence of the notice regarding replacement, the policy summary, the contract summary, and any ledger statements for at least three years or until the insurer's next examination is completed; and notify applicants that they have a right to an unconditional refund of all premiums paid if they decide not to keep the policy within 20 days after it has been delivered.

A Policy Summary is a written statement describing various elements of the life insurance policy, including the following:

A statement of policy cost and benefit information The name and address of the agent The name and home office address of the insurer The generic name of the basic policy and each rider The effective policy loan annual percentage interest rate (if included in the policy ) Life insurance surrender cost and net payment cost indexes for 10 and 20 years (or until the end of the premium paying period, if earlier) The date on which the policy summary was prepared

True or False? The insurer must provide a Buyer's Guide and a Policy Summary to any prospective purchaser upon request.

True. The insurer must provide, to all prospective purchasers, a Buyer's Guide prior to accepting the applicant's initial application, premium, or premium deposit. A Policy Summary must be delivered with or prior to delivery of a policy. If an illustration (spreadsheet) is used in the sale of a policy, a Policy Summary does not have to be provided. If the policy for which application is made or its Policy Summary does not contain an unconditional refund (free look) provision of at least 10 days, the Policy Summary must be given prior to delivery of the policy.

Annuity Contract Summary:

Insurers must provide each prospective purchaser of an annuity contract with a contract summary before accepting the purchaser's initial consideration. If the annuity contract or contract summary provides an unconditional refund period of at least 10 days (a free-look provision), however, the contract summary may be delivered with or before the delivery of the annuity contract. Insurers must also provide a contract summary to any prospective purchaser upon request.

The replacement regulations do not apply to:

credit life insurance; group life insurance or group annuities; transactions where the replacing and the existing insurer are the same; proposed life insurance that is to replace life insurance under a binding or conditional receipt issued by the same company that issued the policy to be replaced; and exercise of a contractual change or conversion privilege under an existing policy or contract

An insurance producer or, where no insurance producer is involved, the responsible insurer representative must, at the time of sale:

make a record of any recommendation subject to this section; obtain a customer-signed statement documenting a customer's refusal to provide suitability information, if any; and obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if a customer decides to enter into an annuity transaction that is not based on the insurance producer's or insurer's recommendation.

When using an illustration in the sale of life insurance, an insurer or its agent may not:

represent the policy as anything other than a life insurance policy; use or describe nonguaranteed elements in a misleading manner; state or imply that the payment of nonguaranteed elements is guaranteed; use an illustration that depicts policy performance at any policy duration as more favorable to the policyowner than indicated by the illustrated scale of the insurer; provide an applicant with an incomplete illustration; represent that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless that is the fact; use the terms vanish or vanishing premium, or a similar term that implies the policy becomes paid up, to describe a plan for using nonguaranteed elements to pay a portion of future premiums; use an illustration that is lapse-supported (except for policies that can never develop nonforfeiture values); or use an illustration that is not self-supporting

In the case of an exchange or replacement of an annuity, the exchange or replacement is suitable including taking into consideration whether

the consumer will incur a surrender charge, be subject to the commencement of a new surrender period, lose existing benefits (such as death, living, or other contractual benefits), or be subject to increased fees, investment advisory fees or charges for riders, and similar product enhancements; the consumer would benefit from product enhancements and improvements; and the consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 36 months.

These values must be listed, when applicable, for:

the first five policy years; representative policy years thereafter to illustrate the premium and benefit patterns; and at least one year when the policyholder is between ages 60 and 65 (or policy maturity, whichever is earlier).

Each insurer must notify the Commissioner whether a policy form is to be marketed

with or without an illustration. If the insurer identifies a policy as one to be marketed without an illustration, any use of an illustration for that form prior to the first policy anniversary is prohibited.