In recent years there have been many cases of insurance agents selling unsuitable annuities to members of the public, especially seniors.  These annuities typically involve large premiums and very large cash surrender charges.  The large cash surrender charges are often in place for at least the first five years of the annuity and usually exist because of the very large commissions that are paid to the insurance agents selling them.  Also, the rates of return in the annuities are often misrepresented.  Insurers and their agents also often sell unsuitable annuities as part of 412(i) plans (named by the IRS Code section which applies to them), and sometimes the IRS disallows deductions, classifying them as abusive tax shelters.  In order for these annuities to be financially viable for persons or businesses buying them, the purchasers must keep them in force for many years.  Because many individuals and some businesses are not in a position to keep them in force for many years, and because they do not provide flexibility, they are often grossly unsuitable for the individuals or businesses purchasing them.

On March 7, 2011, Insurance Commissioner Dave Jones announced new regulations aimed at protecting seniors from financial abuse by those selling seniors an unsuitable annuity.  Here is the press release:

“Seniors and their family members need to know that not all annuities are a good fit for their individual circumstance,” Commissioner Jones said. “While a new annuity may seem like a good idea, all too often, unsuitable annuities have cost some seniors their life savings.”

An annuity is an insurance contract that is created when an individual gives a life insurance company money which may grow on a tax-deferred basis and then can be distributed back to the owner, either immediately or over a period of time. These new regulations are an important step towards ensuring that seniors are not deceived into tying up their money in long term annuities when they cannot pay their living expenses, and are fully aware of the products they are purchasing.

The purpose of the new regulations is to require insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers aged 65 and older that result in the sales of annuities so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed. The proposed regulations are based on the National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulations of March 2010. The regulations require insurers to establish a system to supervise the recommendations made by the insurer or by the insurers’ agent to a consumer that result in the purchase of an annuity. The regulations exempt certain transactions — direct response solicitations where there is no recommendation made based on information collected from the consumer, for instance, as well as annuities used to fund certain other investments, such as ERISA plans.

The regulations set forth duties of insurers and insurance producers that in recommending to a consumer the purchase of an annuity, or the exchange of an annuity, the producer or insurer must have reasonable grounds for believing that the recommendation is suitable for the consumer based on information given by the consumer about her finances and investments. The regulations make it clear that insurers and insurance agents shall not sell an annuity unless there is a reasonable basis to believe that the annuity is suitable based on the consumer’s financial needs and objectives. The regulations require insurers to establish a supervision system designed to achieve the insurers’ and the producers’ compliance with suitability standards and allow insurers to contract out the supervision function. The regulations require that all insurance producers be adequately trained pursuant to California law prior to soliciting the sale of an annuity. The regulations give the Commissioner the authority, among other things, to order an insurer to take corrective action when he determines that a violation of the regulations has occurred. The regulations also specify record-keeping requirements for producers transacting annuities. The new regulations have been filed by Commissioner Jones with the Office of Administrative Law, where they are available for public comment and review before becoming law.

Purchasing insurance and other financial products such as annuities that meet an individual’s specific needs can be challenging. Since an individual’s financial situation may change over time, it is important to review and understand any insurance policy or contract to decide if it is still appropriate. Insurance Commissioner Jones offers the following tips to seniors who are considering purchasing a new or replacement annuity policy:

•    Obtain all proposals in writing.
•    Don’t be pressured into buying any insurance product. Take enough time to review the information before making any decisions.
•    Do not sign anything you do not understand.
•    Consider having a trusted family member, friend or advisor participate in discussions concerning the purchase of any insurance product.
•    Make sure the agent, broker and insurance company are properly licensed to sell the product you are considering purchasing.
•    Make sure you receive a full disclosure of all information relating to the benefits and possible negative consequences regarding the replacement of an existing annuity.
•    Obtain a full disclosure of all surrender charges and related time frames in connection with an annuity prior to purchase.

This information provided is not all inclusive and does not negate or preempt existing California law.  If a senior or anyone has questions or wishes to discuss any insurance matter, the officers at the CDI Consumer Hotline are available to help. Please call 1-800-927-HELP (4357) or visit www.insurance.ca.gov. “

For additional information about annuities, visit http://www.insurance.ca.gov/0100-consumers/0060-information-guides/0020-life/life-insurance.cfm