Annuity Suitability

Written by Hersh Stern Updated Friday, November 1, 2024

Why do insurers ask for so much personal information when you buy an annuity? (A plain English explanation of ‘annuity suitability’ rules and how they work)

The headlines have sadly become all too common. Hackers breach databases at retail stores and access personal information. We are urged to step up our vigilance and be cautious with our data so we don’t fall victim to identity theft.

Now you’re shopping for an annuity. You know these contracts can make good financial sense.

But as you get more serious about your purchase, you discover that some insurers want lots of detailed information about you including things like what investments you own and what your income is.

Alarm bells may ring for you if you’re leery of providing such data. You wonder who is going to look at it, how they are going to use it and whether it will be stored securely. I frequently get asked questions about this by customers who value their privacy and security.

Rules seek to make sure your annuity fits your needs

The reality is that these checks are part of a regulatory effort to make sure that consumers like you are not getting talked into buying products that are inappropriate for their needs or means. The effort is designed to ensure "annuity suitability" – the term regulators use to refer to making sure there is a good match between your circumstances and the terms of your annuity.

These rules are a response to horror stories about unscrupulous agents selling contracts to aging widows that tie their money up until they are over 100 or putting clients into annuities with massive and lengthy surrender fees.

So while you may not love the idea of making these disclosures to your insurance company, the reality is that they are required by state law to gather this information. The aim is not to sell you more or put your name on a marketing list but rather to comply with rules which make sure you are matched with a product that meets your needs.

As one of the most vocal voices in our industry for transparent and ethical dealings with clients, ImmediateAnnuities.com wholeheartedly supports rules that make it harder for bad actors to swindle clients with annuities and tarnish the reputation of one of the most valuable tools for retirement income security.

But we’re also consumers like you and understand why you might want to minimize information sharing. In this article, we’ll look more closely at how this “annuity suitability” effort arose and what it entails. We’ll also talk about options to avoid these disclosures and the consequences of that choice.

How these regulations came about

In 2010 the body that represents insurance regulators in each state, the National Association of Insurance Commissioners (NAIC), came up with what it described as a “model regulation” for annuity suitability. It is intended to be a template for laws adopted by each state individually.

The rule spells out insurance companies’ responsibilities in making sure your annuity is a good match. One of those is to collect information about your means, expectations, age, needs and investing expertise. The idea is to show that you can afford your annuity and it meshes well with your time horizon and needs.

States began adopting these rules. A few, such as California and Florida, have adopted their own versions that are more stringent than the model.

Now, when you go to buy or exchange an annuity, as you move forward with the transaction, it is up to the insurance carrier to ensure that your financial objectives and needs are appropriately addressed.

The NAIC says that when assessing a transaction, insurers and agents must reasonably believe that:

• You would benefit from the annuity.
• The annuity is suitable for you.

Insurers have to maintain procedures to detect any recommendations that aren’t suitable. They can face sanctions or penalties if they don’t comply. The rules also require annuity agents to get adequate training.

What information is gathered?

Based on these regulations, there are 12 key factors that must be considered. These criteria include your:

• Age
• Annual income
• Financial situation and need, including the financial resources that you are using to fund the annuity purchase itself
• Financial experience
• Financial objectives
• Intended use of the annuity
• Financial time horizon
• Existing assets, including any investments and life insurance holdings that you currently own
• Liquidity needs
• Liquid net worth
• Risk tolerance
• Tax status

This information is collected to ensure that the annuity purchase will not cause you significant financial hardship when making the annuity's premium deposits, based on your annual income, your net worth, or your other financial status.

How the suitability process works

The exact process varies by insurer, but generally insurers check to verify you are not putting more than half of your liquid net worth in an annuity. If so, they want heightened review of your plans that will take into account your age and total liquid net worth.

The older you are, the greater emphasis they will put on making sure you have enough money to cover expenses. Suitability reviews are more rigorous for those over 65.

In addition, the total size of your liquid assets is a factor. The lower the amount, the less insurers want to see allocated to deferred annuities. They also look for documentation that you have resources to cover an emergency.

If the company decides the annuity isn’t suitable for you, they will contact your agent and usually send a letter to you.

How insurance companies use your information

The primary goal of collecting all of this information about you and your financial status prior to the sale of an annuity is to document you have a thorough understanding of all of the features of the annuity contract, as well as to ensure that the particular annuity that is being presented to you is suitable.

Some insurers also ask agents to keep notes about how they arrived at the conclusion that your annuity was a good match for you and any recommendations they made.

Once this data is collected, however, the insurance company may not share or sell your nonpublic personal information to any non-affiliated third party without first obtaining your consent to do so, as this would be considered a violation of the Right to Financial Privacy Act.

The insurance companies are required to keep your information so they can document their efforts to comply with the rule if they are audited. Otherwise, no one sees it. The companies stress that they have safeguards in place to protect your data, and we have not heard of any breaches of this information.

Can I opt out of this requirement?

Some companies will allow you to opt out of disclosing if you sign a statement saying you refused to give the information and understand you are losing protections and redresses offered by the law. A few insurers do follow-up checks to make sure your sales person didn’t encourage you to do that as a way of circumventing the suitability rules.

Other companies, however, will not allow you to buy their contracts if you don’t participate in the suitability process. At that point, you have to weigh how important your privacy is if the most attractive annuity is offered by a company that won’t let you opt out. It’s a personal decision, of course, but we would encourage you not to let the annuity suitability disclosure be the deciding factor in your decision.

The Bottom Line

Overall, annuities can be an important component to your portfolio mix - especially given increased longevity and the need for guaranteed lifetime income going forward since you don't want to run out of income before running out of time.

Yet, because all investors' situations and needs are unique, it is still essential to ensure that each and every product is suitable for the individual consumer who will be purchasing it. Therefore, having suitability regulations in place can make your annuity purchase more financially sound.

Do you have questions? We’re here to help. Either drop us a note in the comments or get in touch with us here.