New California Law Requires That Insurers and Agents Verify that an Annuity is Suitable for the Consumer

California Governor Jerry Brown recently signed a new law that will provide increased protection to seniors and other consumers who are interested in purchasing an annuity.  AB 689, which was sponsored by the California Department of Insurance and authored by Assembly Budget Committee Chair Bob Blumenfield (D-San Fernando Valley), requires that insurers verify that an annuity purchase is suitable and appropriate for the consumer based on an evaluation of his or her age, income, financial objectives and ten other factors.  The bill was unanimously passed by both the state Senate and the state Assembly.

Lawmakers felt that additional protection was necessary because many consumers have only a vague understanding of the conditions and risks associated with the purchase of an annuity.  Assembly Member Blumenfield said that another reason for the new law is that annuities are often sold to seniors, who sometimes do not understand “that their money will be unavailable to them for years.”  In addition, annuities are typically very expensive in the short term, a fact which is not always properly conveyed to consumers.  Finally, as noted by Blumenfield, the sale of annuities is often a “breeding ground for fraud.”

Before the passage of the new law (located in the California Insurance Code, beginning at section 10509.910), agents and insurers were required to fulfill only limited requirements when selling or replacing life insurance policies and annuities.  Now, insurance companies and agents must comply with very specific requirements when recommending that a consumer purchase, exchange or replace an annuity.  Specifically, after evaluating 13 different suitability factors (detailed in section 10509.914(i)), an insurance company and agent can only sell an annuity if there are “reasonable grounds for believing that the [annuity] is suitable for the consumer.”  See Insurance Code section 10509.915(a).  The bill also requires that an insurance agent receive Insurance Commissioner-approved training before he or she can sell annuities.

McKennon Law Group PC has several cases dealing with unsuitable annuities.  More often than not, annuities are not properly sold and we often find that insurance agents and insurers often do not make truthful representations about them.  Although this law should help stem the tide of unsuitable annuity sales, problem annuity sales will continue to plague the insurance industry for a long time to come.

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