TEXAS ANNUITIES 8 HOURS

Transcription

1 TEXAS ANNUITIES 8 HOURS COPYRIGHT 2014, SUCCESS CONTINUING EDUCATION 2 Corporate Plaza Drive, Suite 100 Newport Beach, CA (949) (A member of the Success CE family of Companies.) All Rights Reserved. No part of this publication may be used or reproduced in any form or by any means, transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of Success Continuing Education, Inc. This publication is designed to provide general information on the topic presented. It is sold with the understanding that the publisher is not engaged in rendering any legal or professional services. Although professionals prepared this information, it should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought. 1

2 CHAPTER INTRODUCTION... 1 CONTINUING EDUCATION... 3 Initial 4-Hour Annuity Training Requirement... 4 Ongoing 8-Hour Annuity Continuing Education Requirement... 4 CHAPTER ANNUITY REGULATION... 5 WHAT IS AN ANNUITY?... 5 TEXAS DEPARTMENT OF INSURANCE... 5 DISCLOSURE REQUIREMENTS... 6 Required Consumer Notices... 7 ANNUITY CONTRACT TYPES... 8 Fixed Annuities... 9 Variable Annuities Equity-Indexed Annuities Immediate Annuity Deferred Annuity Split Annuity Two-Tiered Annuities ACCUMULATION PHASE AND PAYOUT PHASE ANNUITY SETTLEMENT OPTIONS Straight Life Settlement Option Life Only With Guaranteed Minimum Option or Cash Refund Joint Life Annuity/Survivorship Joint and Contingent Survivor Settlement Option Life Annuity With Period Certain Period Certain Settlement Option Amount Certain Settlement Option Investment Income Settlement Option SUITABILITY CHAPTER 2 REVIEW QUIZ CHAPTER NAIC SUITABILITY IN ANNUITY TRANSACTIONS MODEL REGULATION NAIC SECTION 1 PURPOSE NAIC SECTION 2 SCOPE NAIC SECTION 3 AUTHORITY NAIC SECTION 4 EXEMPTIONS TDI Section Applicability; Exemptions TDI Section Applicability; Exemptions NAIC SECTION 5 DEFINITIONS

3 NAIC SECTION 6 DUTIES OF INSURERS AND OF INSURANCE PRODUCERS TDI Section Suitability of Annuity Product Required TDI Section Supervision System TDI Section Duties of Insurers That Use Agents TDI Section Duties of Insurers Regarding Direct Response Solicitations NAIC SECTION 7 INSURANCE PRODUCER TRAINING TDI Annuity Continuing Education TDI Section Agent Training Requirements NAIC SECTION 8 MITIGATION OF RESPONSIBILITY TDI Section Mitigation TDI Section Sanctions The Need for Complete Recordkeeping NAIC SECTION 9 [OPTIONAL] RECORDKEEPING TDI Section Recordkeeping Requirements NAIC SECTION 10 EFFECTIVE DATE CHAPTER 3 REVIEW QUIZ CHAPTER REPLACEMENT OF LIFE INSURANCE AND ANNUITIES SECTION DEFINITIONS POLICY SUMMARY Section Definition of Policy Summary FINANCED PURCHASE Section Financed Purchase NOTICE OF EXISTING POLICY OR CONTRACT Section Duties of Agent; Notice Section Duties of Replacing Insurers That Use Agents TITLE 28, PART 1, CHAPTER 3 SUBCHAPTER NN Section Consumer Notice Regarding Replacement For Insurers Using Agents60 Duties of Insurers Regarding Direct Response Solicitations Form (b) Form (a)(1) Section Direct Response Consumer Notices Section Filing Procedures For Substantially Similar Consumer Notices CHAPTER 4 REVIEW QUIZ CHAPTER DISCLOSURE AND SUITABILITY LAWS Misrepresentation Regarding Policy or Insurer False Information and Advertising Defamation of Insurer Boycott, Coercion, or Intimidation False Financial Statement Prohibited Rebates and Inducements

4 Unfair Discrimination in Life Insurance and Annuity Contracts Certain Practices Not Considered Discrimination or Inducement Deceptive Name, Word, Symbol, Device, or Slogan Unfair Settlement Practices Misrepresentation of Insurance Policy CHAPTER 1115 SUITABILITY OF CERTAIN ANNUITY TRANSACTIONS Section Definitions Compliance With Certain National Standards CHAPTER 5 REVIEW QUIZ CHAPTER PENAL CODE CHAPTER TYPES OF INSURANCE FRAUD UNAUTHORIZED INSURANCE PLANS TEXAS FRAUD UNIT Duty To Report Immunity for Furnishing Information Relating to a Fraudulent Insurance Act LAWS GOVERNING INSURANCE FRAUD Sec Definitions Sec Materiality Sec Insurance Fraud ENFORCEMENT PENALTIES Class A Misdemeanor Class B Misdemeanor Class C Misdemeanor Capital Felony First Degree Felony Punishment Second Degree Felony Punishment Third Degree Felony Punishment State Jail Felony Punishment Value of Claim Aggregation and Multiple Offenses Jurisdiction of Attorney General CHAPTER 6 REVIEW QUIZ CHAPTER DIMINISHED CAPACITY LEGAL CAPACITY DIMINISHED MENTAL CAPACITY Recognizing Diminished Mental Capacity Indicators of Diminished Mental Capacity CHAPTER 7 REVIEW QUIZ ANSWERS TO CHAPTER REVIEW QUIZZES

5 CHAPTER 1 INTRODUCTION Annuity producers are in a unique position as they take on the task of selling an intangible product a product that cannot be evaluated in the same way as a physical, touchable, product can. Annuities are complex financial instruments and contracts are full of legal terms, exceptions, and contingencies all necessary, of course. The average consumer is typically unprepared to fully understand the complexities of an annuity contract, so they must trust the person selling them the product. Most often this trust is well deserved but the very atmosphere surrounding such transactions can be tainted by misleading or deceptive acts or misrepresentation. It is of paramount importance that annuity producers do not mislead consumers into entering into a transaction that is not in the consumer s best interest. Insurance commissioners have closely monitored complaints rising from the sale of annuity products. These studies have led to many changes in regulatory statutes. Not only at the state level, but at the federal level as well. The National Association of Insurance Commissioners (NAIC) adopted a white paper in 2000 that called for the development of suitability standards for nonregistered annuity products similar to the standards that existed under the Securities and Exchange Commission (SEC) for registered products. In order for the producer to have a clear understanding of the direction of regulation in annuity sales, we will review the NAIC Model Regulation as part of this course. As each state adopts the regulation, they are likely to make changes to contemporize the Model Regulation to local law and circumstance, so it is important for the producer to realize that the Model Regulation is not a binding law. For instance, the additions that have occurred within the Texas Administrative Code, Title 28, that we will be studying within this course. The task given to the NAIC Life Insurance and Annuities Committee is to: Draft a white paper discussing issues related to suitability of sales of life insurance and annuities. Make recommendations as to the advisability of drafting a model law or regulation giving insurers responsibility to determine suitability of sales of life insurance and annuities. As a result, model regulation was drafted and adopted setting suitability standards for all life insurance and annuity products. 1

6 The NAIC committee decided to focus first on the area that had been identified as subject to the greatest abuse that being the inappropriate sales of annuities to persons over the age of 65. The resulting Senior Protection in Annuity Transactions Model Regulation ( Suitability Model ) was adopted by the NAIC. The purpose of this regulation is to set forth standards and procedures for recommendations to senior consumers that result in a transaction involving annuity products so that insurance needs and financial objectives of all senior consumers, at the time of the transaction, are appropriately addressed. The Model Regulation applies to both fixed and variable annuities. This new model was another tool that regulators could use to protect consumers from inappropriate sales practices in addition to the previous NAIC Annuity Disclosure Model Regulation. In March of 2010, the NAIC voted to adopt revisions to the NAIC Suitability in Annuity Transactions Model Regulation. Individual states have also undertaken the task of regulating the sale of annuities. House Bill 2762 focused primarily on disclosure when the consumer currently owns an annuity, which is an important part of suitability. As a result, Chapter 1114 was added to the Texas Insurance Code to address policy replacement disclosure, requiring the agent and insurer to use a number of disclosure documents when recommending a consumer purchase of an annuity or life insurance policy using values in an existing annuity. House Bill 2761 established a suitability requirement for the sale of annuities made after January 1, As a result, Chapter 1115 was added to the Texas Insurance Code setting forth standards and procedures regarding recommendations made to consumers that result in annuity transactions. In the final chapter of this course, we will take an in-depth look at how an agent can recognize certain indicators that a prospective insured may lack the shortterm memory or judgment to knowingly purchase an annuity, addressing Rule (g)(3). In this first chapter, however, we will take a refresher on many of the various annuities that are available in the marketplace today and how the Texas Department of Insurance regulates the sale of annuity products. Whether the student is a new agent or a veteran, new insights will be gained into the world of annuities. Current annuity information and regulations provided in this course will enable the student to brush up on knowledge already acquired. 2

7 Annuities have been available in the United States for more than 100 years; in other countries, they have been available for several hundred years. Although annuities are sold only by the insurance industry (i.e., insurance agencies, brokerage firms, investment advisors, financial planners, banks, and savings and loans institutions), they are not life insurance nor do they provide insurance coverage. Contractual guarantees contained in annuities depend upon the type of annuity purchased. Chapter review questions will be presented at the end of each chapter. These questions will help the reader to enhance retention of key elements and to confirm the student s mastery of course content. Answers to the chapter review questions will be presented at the end of the course material. CONTINUING EDUCATION Maintaining compliance with continuing education requirements is paramount for busy insurance agents to keep up to date with important topics and changes in their fields of expertise. Any time an individual returns to studying, they are continuing their education. There are any number of educational seminars, workshops, and home study courses that are designed by continuing education experts in various areas of the insurance industry, and presented throughout the year all over the United States. All courses must be submitted to and approved by the Department of Insurance. Continuing education rules and requirements are set forth for insurance agents to remain in compliance with their respective licensures. Texas insurance agents who sell, solicit, or negotiate annuities are required to complete Departmentcertified annuity courses. The Texas Department of Insurance Agent and Adjuster Licensing Division is enhancing efforts to ensure that licensed persons are able to meet their required continuing education obligations under Texas Insurance Code Chapter Postcard notifications are mailed out to license holders prior to their renewal deadline to remind each agent that they may have additional CE hours to complete. Notices will be mailed out the licensee s last known mailing address. Licensees who have been continuously licensed by the Texas Department of Insurance for at least 20 consecutive years (no breaks greater than 90 days) and have not applied for a permanent exemption from CE can do so by completing Form LHL216, which can be found on the Department s website. If a licensee surrenders their license or does not renew it, that licensee cannot perform the acts of a licensed insurance agent. As part of the cancellation and non-renewal process, all related appointments will be canceled and any insurers notified. The cancellation or failure to renew does not remove the CE violation. The licensee s record will remain associated with the individual s record for a period of five years. 3

8 To maintain your license, whether or not you are using it, you must meet your continuing education requirements. There is no continuing education grace period. Once the expiration date has passed, a violation exists. CE cannot be made up after the expiration date. The fine for not completing the required continuing education is $50 per deficient hour. Initial 4-Hour Annuity Training Requirement Texas resident agents who sell, solicit or negotiate annuities and who were licensed prior to April 1, 2010 must complete a four (4) hour Annuity Certification Course prior to their next renewal occurring on or after April 1, Resident agents with a license issued on or after April 1, 2010 must complete a four-hour Annuity Certification Course before selling, soliciting, or negotiating annuities. Texas resident agents only must complete eight (8) hours of ongoing annuity continuing education during each renewal period subsequent to completing the initial one-time four-hour Annuity Certification Course. The continuing education exemption based on 20 years of continuous licensure does not apply to the Annuity Certification Course requirement. Ongoing 8-Hour Annuity Continuing Education Requirement Texas resident agents only must complete 8 hours of ongoing annuity continuing education during each renewal period subsequent to completing the initial one-time 4-hour Annuity Certification Course. The initial one-time 4-hour annuity-training course counts toward this 8-hour requirement during the renewal period it is completed. The continuing education exemption based on 20 years of continuous licensure does not apply to the annuity continuing education course requirement. 4

9 CHAPTER 2 ANNUITY REGULATION WHAT IS AN ANNUITY? An annuity is a type of financial insurance contract that can accumulate value and provide a steady stream of income over a long period of time. People most often use annuities to build retirement savings. Annuities can also provide future funding for a child s education, create a trust fund, or provide for a surviving spouse or child. An annuity contract, for the purposes of regulation under the Insurance Code, is considered an insurance policy or contract if the annuity contract is issued: 1) By a life, health, or accident insurance company, including a mutual company or fraternal benefit society; or 2) Under an annuity or benefit plan used by an employer or individual. An insurer that makes or proposes to make an insurance contract is engaging in the business of insurance in the State of Texas. The Insurance Code specifies that taking or receiving an insurance application or issuing or delivering a contract to a resident of this state constitutes the business of insurance. TEXAS DEPARTMENT OF INSURANCE The Texas Department of Insurance ( Department or TDI ) regulates annuities. Agents and companies that sell annuities in the state must possess a valid Texas insurance license. TDI and the U.S. Securities and Exchange Commission (SEC) jointly regulate variable annuities. The Financial Industry Regulatory Authority an independent nongovernmental agency that regulates security firms also licenses agents who sell variable annuities. TDI has implemented controls that are operating effectively to ensure that companies annuity form filings comply with applicable laws and regulations. In addition, the Department licenses and regulates individuals who sell annuities according to relevant laws and regulations. 5

10 The Department ensures the annuity forms that insurance companies file comply with laws and regulations by: 1) Providing training to the specialists who review these forms; 2) Developing, using, and periodically updating checklists and actuarial spreadsheets tailored for the different types of forms submitted; 3) Conducting random audits of submitted forms that are exempt from preapproval; 4) Ensuring that management reviews a sample of forms that have been approved or disapproved by specialists in the Life/Health Division; and 5) Developing an implementation plan after each legislative session. The Department licenses only those individuals who meet all statutory requirements for their respective license types; maintains the proper status in its licensing system for licenses that have been revoked; and conducts audits of licensees continuing education efforts that are effective in identifying noncompliance with laws and regulations. The Department s Life/Health Division examines annuity forms that are subject to review that insurance companies file with the Department. During these reviews, Department staff ensures that policies, contracts, certificates, and related insurance forms comply with Texas laws. The Department s Licensing Division processes agent licenses. Two license types are eligible to sell annuity products: 1) General Lines Life Accident Health and HMO; and 2) Life Agent. DISCLOSURE REQUIREMENTS The purpose of Title 28, Part 1, Chapter 3 (Life, Accident and Health Insurance and Annuities) is to provide standards for the disclosure of certain minimum information about annuity contracts, and to assist purchasers of annuity contracts to understand certain basic features of annuity contracts. The Commissioner of Insurance adopted these regulations to address disclosures pertaining to annuities. The rules are necessary to require insurers to provide annuity applicants and contract owners with necessary information regarding annuities. The purpose of the required disclosures is to provide consumers with educational and identifying information regarding annuities that will enable them to make a decision that is more likely in their best interest and to reduce the opportunity for misrepresentation and incomplete disclosure. These 6

11 rules are based on the National Association of Insurance Commission s Annuity Disclosure Model Regulation. The sections apply to all group and individual annuity contracts and certificates (unless specifically excepted by the rules). Insurers are required to provide specific disclosures to both annuity applicants and annuity contract owners. The disclosures consist of a report to contract owners (on at least an annual basis) and a disclosure document and a buyer s guide for annuity applicants. The report to contract owners provides consumers with information regarding the current status of their contract and any changes that may have occurred to their account since the inception of the contract or since their last report. The buyer s guide provides annuity applicants with educational information regarding annuity types and features. The disclosure document provides annuity applicants with information regarding the features and restrictions of a particular annuity product. Rules specify that if the required buyer s guide and disclosure document are not provided to an applicant at or before the time of application, a free look period of at least 15 calendar days, beginning upon receipt of the contract, must be provided during which the applicant may return the contract without penalty. Required Consumer Notices Rule addresses consumer notices that are required under this section. a) If an application for an annuity contract or certificate is taken in a face-to-face meeting, the applicant shall be given at or before the time of application both a disclosure document and the appropriate buyer s guide specified in of this subchapter (relating to Buyer s Guide). b) If the application is taken by means other than in a face-to-face meeting the applicant shall be sent not later than the fifth business day after the date on which the completed application is received by the insurer both a disclosure document and the appropriate buyer s guide specified in of this subchapter. c) If the insurer receives the application as a result of a direct solicitation through the mail, the insurer s providing the appropriate buyer s guide and a disclosure document in a mailing inviting prospective applicants to apply for an annuity contract or certificate satisfies the requirement in subsection (b) of this section that the appropriate buyer s guide and the disclosure document be provided not later than the fifth business day after the date of receipt of the application. d) If the application is received through the Internet, and if the insurer takes reasonable steps to ensure that the appropriate buyer s guide and a disclosure document are available for viewing and printing on the insurer s website which are opened or acknowledged by the prospective applicant, the provided 7

12 buyer s guide and disclosure document shall be deemed to satisfy the requirement that the appropriate buyer s guide and the disclosure document be provided not later than the fifth business day after the date of receipt of the application. e) A solicitation for an annuity contract that is provided in a manner other than a face-to-face meeting must include a statement that the proposed applicant may contact the insurer for a free annuity buyer s guide. f) Insurers receiving an application for private placement contracts as defined by the Insurance Code (a) are not required to provide the buyer s guide specified in of this subchapter. g) This section applies regardless of whether an insurer is providing a 15-day free look period like that required in 39711(a) of this subchapter (relating to Free Look Period) prior to the adoption of this subchapter or whether the insurer begins providing the 15-day free look period in accordance with (a) of this subchapter. Rule refers to Rule several times for clarity purposes, Rule is presented here. For the purposes of this subchapter, an appropriate buyer s guide is the latest version of the buyer s guide adopted by the NAIC that applies to the particular type of annuity (such as fixed deferred annuity, equity-indexed annuity, or variable annuity) that is the subject of the transaction. If the NAIC has not adopted a buyer s guide for equity-indexed annuities, then the appropriate buyer s guide is the Buyer s Guide to Fixed Deferred Annuities that has been most recently adopted by the NAIC. If the NAIC has not adopted a buyer s guide for variable annuities, then no buyer s guide is required until one year after the date on which this subchapter becomes effective. If the NAIC has not adopted a buyer s guide for variable annuities within one year after the date on which this subchapter becomes effective, then for purposes of this subchapter the appropriate buyer s guide is the latest version of the SEC s Office of Investor Education and Advocacy Variable Annuities What You Should Know, SEC Pub ANNUITY CONTRACT TYPES A life annuity is a financial contract in the form of an insurance product according to which the insurer makes a future payment to the annuitant in exchange for the immediate payment of a lump sum or through a series of regular payments made prior to the onset of the annuity. 8

13 There are two possible phases for an annuity: (1) The accumulation phase in which the consumer deposits and accumulates money into the account; and (2) The distribution phase (annuitization period) in which the insurer makes income payments to the annuitant. Annuities are flexible with regard to the options that are available. Individual purchasers have many options concerning the structure and design of the annuity to suit their needs, such as: Funding method The investor can decide whether they want a single lump-sum payment or period payments made over a period of time. Date annuity benefit payments begin The investor can decide whether they want the annuity proceeds paid to them immediately or to have payments deferred until a future date. Investment configuration The investor can decide whether they want a guaranteed (fixed) rate of return or a nonguaranteed (variable) rate of return. Payout period The investor can decide whether they want to receive benefit payments for a specified period of years or for life, or even a combination of both. Many annuities offer an inflation adjustment or rider during the annuitization period. Inflation benefits vary from product to product and need to be evaluated separately. There are so many different types of annuities out on the market today and they are each unique as they contain varying options and features. Though this is the case, overall, there are basically three main annuity types: (1) Fixed Annuities; (2) Variable Annuities; and (3) Equity-indexed annuities. Fixed Annuities A fixed annuity is an annuity in which the annuity funds (less any applicable charges) earn interest at rates set by the insurance company or in a way specified in the annuity contract. Fixed annuities pay an interest rate that is guaranteed for one or more years and have surrender charges that typically decrease over the same amount of time. 9

14 Fixed annuities are the least risky because they are invested in conservative, non-stock market investments, such as government and corporate bonds. Typically, the contract owner does not have input into how the contract funds are managed. Fixed annuities generate earnings at the current interest rate that is set annually by the insurance company. The fixed annuity provides a guaranteed rate of return. The rate can change, but will never fall below the guaranteed minimum rate. A traditional fixed annuity guarantees that deposits will accumulate at a minimum specified rate of interest. The insurance company, however, may pay a higher rate of interest if its investment experience is greater than the minimum interest guarantee. When an investor purchases a fixed annuity, the contract owner knows the current and guaranteed interest rates upfront and is aware that fixed rates of interest will be earned on the contract values as long as the contract remains in place. A fixed annuity offers the investor security because the rate of return is certain and is declared in advance. The risk of performance falls on the company issuing the annuity, and the annuitant does not have to assume responsibility for investing the funds. Because fixed annuities guarantee fixed, monthly payments, those payments will vary and will depend upon the performance of the investment options chosen by the insurer. Fixed annuities do not fluctuate in value. Premiums paid for fixed annuities are invested with the insurance company s general funds, chiefly in fixed-income types of securities, with the ultimate purpose of providing the annuitant with a level annuity income. Although the fixed annuity affords the contract owner a guaranteed rate of return, that rate is dependent upon the length of time the funds will be invested. The most common maturity periods for annuities are one, three and five years the longer the commitment, the higher the guaranteed rate of return for the contracted period. The fixed nature of these annuities applies to the amount of the benefit to be paid out during the annuitization period. In a fixed annuity, the contract owner is protected against rising or declining interest rates, stock market gains or losses, and insurance company profits or losses through guarantees regarding the safety of principal the contract owner knows the exact amount of interest the annuity investment will earn. The conservative investor will find such guarantees and assurances appealing. Market value adjusted annuities are a type of fixed annuity that pay more than the guaranteed minimum rate for a designated period of time. The contract owner may withdraw money before the period ends but will be subject to an early surrender charge, and the annuity s surrender value will be based on current market interest rates. 10

15 Utilizing this type of annuity can prove to be a stabilizing factor in the overall portfolio of the moderate to aggressive investor. The guarantee a fixed annuity offers, when used in conjunction with other investments (i.e., real estate, stocks, bonds, gold, mutual funds, etc.), can help a diversified investor feel secure in their overall investment program. Variable Annuities Variable annuities have become a part of the retirement and investment plans of many Americans. Variable annuities are designed to be long-term investments to meet retirement and other long-range goals. Variable annuities are not suitable for meeting short-term goals because substantial taxes and insurance company charges may apply if funds are withdrawn early. A variable annuity is a contract between the contract owner and the insurance company under which the insurer agrees to make periodic payments to the annuitant beginning either immediately or at some future specified date. The insurance company invests the annuity funds (less any applicable charges) into a separate account based upon the risk the contract owner wants to take. A variable annuity offers a range of investment options. The value of the investment will vary depending upon the performance of the underlying investment options the contract owner has chosen. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three. Although variable annuities are typically invested in mutual funds, variable annuities differ from mutual funds in several important ways: First, variable annuities let the annuitant receive periodic payments for the rest of the annuitant s life (or the life of a spouse or other designated recipient). Second, variable annuities are tax-deferred. No taxes are paid on the income and investment gains until the funds are withdrawn. A transfer may also be accomplished from one investment option to another within a variable annuity without paying tax at the time of the transfer. When funds are withdrawn from a variable annuity, earnings will be taxed at ordinary income tax rates rather than at lower capital gains rates. In general, the benefits of tax deferral will outweigh the costs of a variable annuity only if held onto as a long-term investment. Third, variable annuities have a death benefit. If the annuitant dies before the insurer has started making payments, the annuitant s beneficiary is guaranteed to receive a specified amount typically at least the amount of the purchase payments. Some variable annuities allow the contract owner to choose a stepped-up death benefit. Under this feature, the guaranteed minimum death benefit may be based on a greater amount than purchase payments minus withdrawals. For example, 11

16 the guaranteed minimum might be the account value as of a specified date, which may be greater than purchase payments minus withdrawals if the underlying investment options have performed well. The purpose of a stepped-up death benefit is to lock in the investment performance and prevent a later decline in the value of the account from eroding the amount the owner expects to leave the account beneficiary. There is an additional charge, however, for the stepped-up benefit. Some insurers offer variable annuity contracts with bonus credit features. These contracts promise to add a bonus to the contract value based on a specified percentage (typically ranging from one to five percent) of total purchase payments. Bonus credits are usually funded through higher surrender charges or longer surrender periods. They may also be funded through higher annual mortality and expense risk charges or through a separate fee specifically designated for the bonus credit. Variable annuities can provide greater returns than fixed annuities, but they also have greater risk and require the contract owner to be more involved. Unlike fixed annuities, variable annuities typically allow the contract owner to decide how the accumulated value is allocated among the selected investments. With a variable annuity, the contract owner can choose among a variety of separate accounts. Since a variable annuity offers a wider range of investment options than a fixed annuity, the contract owner can be proactive in choosing those investment options. The value of the investments chosen by the contract owner varies in accordance with the total investment performance of the contract. The fluctuation of the cash value and monthly income is the main difference between variable and fixed annuities. Typically, variable annuities allow equity investments and fixed investments, whereas a fixed annuity offers only fixed investments. Most variable annuities will allow the contract owner to change the allocation at no charge for a certain number of times per year. The insurer may charge a fee for any changes over that allotted amount. Since a variable annuity typically invests in a range of financial instruments they are, therefore, highly dependent on the performance of the stock market. A variable annuity generally makes no guarantee about earnings, instead providing the contract owner with a conservative to aggressive investment. A variable annuity fluctuates in value according to the performance of its underlying investments (separate or sub-accounts), which are held by the company in a separate account outside of their general accounts. All variable annuities must be registered with the SEC. These separate accounts are generally expected to increase in value as prices increase through the investment in common stocks and other securities. As you know, since variable 12

17 annuities are dependent on the stock market, earnings are generally not guaranteed. If the annuity performs poorly, the contract owner could lose some or even all of their original investment. There can be a partial remedy, however. Some variable annuities offer a fixed interest account within their investment options. The account essentially acts like a fixed annuity within the variable annuity and guarantees a minimum rate of return. A fixed interest account can be a valuable feature during an economic downturn. Since the SEC classifies variable annuities as securities, unlike fixed annuities, and since their performance is so heavily dependent on the stock market, an agent selling variable annuities must maintain a Financial Industry Regulatory Authority license and a Texas insurance license. The most important source of information for the annuity prospect when considering variable annuity investment options is the prospectus. The annuity purchaser should read the prospectus carefully before allocating purchase payments among the investment options offered. A variety of factors with respect to each fund option should be considered, including: The fund s investment objectives and policies; Management fees and other expenses that the fund charges; The risks and volatility of the fund; and Whether the fund contributes to the diversification of the prospect s overall investment portfolio. Annuity prospects or contract owners should be made aware of some important differences between fixed and variable annuities, such as: There is no guarantee of the principal, interest, or the amount of payment in variable annuities; The annuitant bears the investment risk in variable annuities; and Variable annuities are regulated by state and federal governments. Though both instruments differ in many respects, fixed and variable annuities do have some shared characteristics, including the following: Their primary purpose is to provide retirement income; Methods of purchase; Accumulation and annuity periods; Partial surrender provisions; and The guarantee of expense and mortality. 13

18 Equity-Indexed Annuities Equity-indexed annuities (EIAs) are a variation of a fixed annuity in which the interest rate is based on an outside index, such as the stock market index. Equity-indexed annuities are often referred to as fixed indexed annuities or simple indexed annuities. The equity-indexed annuity pays a base return, but it may be higher if the index increases. The mechanics of EIAs are often complex and the returns can vary greatly. Like many other types of annuities, equity-indexed annuities usually carry a surrender charge for early withdrawal. EIAs may be suitable for a portion of the asset portfolio for those clients who want to avoid risk and who are in retirement or nearing retirement age. The objective of purchasing an equity-indexed annuity is to realize greater gains than those provided by CDs, money markets or bonds while still protecting principal. EIAs combine features of both fixed and variable annuities. They are riskier but offer higher potential returns than fixed annuities. They are usually less risky and offer lower returns than variable annuities. EIAs base returns on changes in stock, bond, and money markets, but they also guarantee a minimum interest rate. The value of the annuity will not drop below the guaranteed minimum. Some equity-indexed annuities place a cap on the maximum rate of interest the annuity can earn. There are two features that have the greatest effect on the amount of interest credited to an equity-indexed annuity: The Indexing Method; and The Participation Rate. An index is a statistical measure of a change in a market. The indexing method is how the amount of change in the index is measured. Following are some of the most common indexing methods: Annual reset (also called ratcheting ); High-water mark; Low-water mark; and Point-to-point Annual reset is determined by comparing the index value at the beginning and at the end of the contract year. Index-linked interest, if any, is added to the annuity each year during the term. Since the interest earned is locked in annually and the index value is reset at the end of each year, future decreases in the index will not affect the interest already earned. The annuity may credit more interest than annuities using other methods when the index fluctuates up and down during the 14

19 term. This method is more likely to provide access to index-linked interest before the term ends. High-water mark is decided by looking at the index value at different times during the term, usually the annual anniversaries of the original purchase date of the annuity. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to the annuity at the end of the term. Since interest is calculated using the highest index value during the term, this method may credit higher interest than other methods if the index reaches a high point early or in the middle of the term, then drops off at the end of the term. Low-water mark is determined by looking at the index value at different times during the term, usually the annual anniversaries of the annuity purchase date. The interest is based on the difference between the index value at the end of the term and the lowest overall index value. This indexing method may credit higher interest than some other methods if the index reaches a low point early or in the middle of the term and then rises at the end of the term. Point-to-point is based on the difference between the index value at the end of the term and the index value at the start of the term it ignores the annual changes in the stock index and changes contract values according to the change in index from one point in time to another. Interest is added to the annuity at the end of the term. Since interest cannot be calculated before the end of the term, this method might have a higher participation rate than annuities using other methods. No matter what features the investor chooses in the structure and design of the appropriate annuity the purchase of an annuity, as in most contractual dealings, begins with the application. The application not only requires the applicant s name, address, and Social Security number, it also requires the following information: Name, Social Security number, address, gender, and date of birth of the annuitant; investment options desired; the source of funds to be deposited; the signature of the contract owner; and the annuitant s signature. Insurance companies use multiple factors in determining annuity premiums, such as: The annuitant s age; gender since women tend to live longer than men, women receive more income payments than men of the same age (except for gender neutral rates if required); the assumed interest rate; the amount of periodic income; contractual guarantees; and insurance company operating expenses ( loads ). Immediate Annuity An immediate annuity is an annuity in which the annuitant begins to receive income payments, typically no later than one year after the premium is paid. 15

20 Immediate annuities are typically purchased with a single payment. Most annuities pay monthly installments, but an immediate annuity is designed to provide for the payment of the annuity benefit in one payment interval from the original date of purchase. Therefore, an immediate annuity has a relatively short accumulation period. Immediate annuities are often called single-premium immediate annuities (SPIAs). Typically, if the annuity is paid with a single premium payment, that payment is relatively large. Annuity payments may be made on a monthly, quarterly, semi-annual, or annual basis and are based on the annuitant s life expectancy or that of the annuitant and his or her spouse. Payments usually begin within one year after purchase, but they can begin in as soon as one month after the original purchase of the annuity. If the insurance company begins paying the annuitant shortly after the purchase of the contract, the immediate annuity must have been paid by a single payment, or all premiums must be received within a 30 to 45-day period immediately after the first premium is received. Deferred Annuity A deferred annuity is an annuity in which the annuitant begins to receive income payments many years later. Deferred annuities are designed to provide payments at some designated future point in time. Deferred annuities typically are not paid with a single payment, but are paid through premium increments. Periodic payment annuities are commonly called flexible-premium deferred annuities (FPDAs). Deferred annuities that are paid with a single premium payment are generally called single-premium deferred annuities (SPDAs). As with single-premium immediate annuities mentioned above, that single premium payment is usually relatively large, but it does not have to be. Insurance companies require minimum premiums for this type of contract and they may range from a few thousand dollars to a much larger amount. The funds placed in an SPDA are left to accumulate for the future. When the annuitant desires to have a stream of income, an annuity settlement option can be exercised. Deferred annuities are often purchased during a consumer s working years in anticipation of the need for retirement income. Most deferred annuities provide a great deal of flexibility surrounding the timing and amount of payout benefits. A deferred annuity offers growth and flexibility over time. The annuitant can elect to receive a certain amount of income each year and can direct how the balance is to be reinvested. This deferral process gives the annuitant the flexibility of automatic reinvesting, withdrawal of a portion of the principal, or termination of the investment altogether. 16

21 During the accumulation period, the annuity funds, minus any charges, earn interest at rates that change over time. Usually, the rates are entirely up to the insurer. The current rate The rate the company decides to credit to the contract at a particular time. The insurer will guarantee it will not change for a certain period. The initial rate The interest rate the insurer may credit for a certain time after the annuity s initial purchase. The initial rate in some contracts may be higher than it will be later This is often called a bonus rate. The renewal rate The rate credited by the company after the end of the designated time period. The contract stipulates how the company will set the renewal rate, which may be tied to an external reference or index. The minimum guaranteed interest rate The lowest rate the annuity will earn. This rate is stated in the contract. Some annuity contracts apply different interest rates to each premium paid to premiums paid during different time periods. Other annuity contracts might have two or more accumulated values that fund different benefit options. These accumulated values may use different interest rates. Split Annuity A split annuity actually consists of two or more (usually two) annuities that utilize differing strategies. While one annuity provides a monthly income for a defined period of time the other restores the original principal invested over the same time period. The strategy of a split annuity uses a single-premium deferred annuity (SPDA) and a single-premium immediate annuity (SPIA). The immediate annuity pays a predetermined amount of income over the chosen time period. The singlepremium deferred annuity is left to grow, with the goal being that at the end of the chosen income period, the deferred annuity will have grown to equal the amount originally invested in both annuities. The premium available to achieve both goals of providing income and rebuilding the original principal is allocated in such a way that the premium allocated to the immediate annuity pays an income to the individual for a specified period. During that same specified period of time, the amount allocated to the single premium deferred annuity grows to equal the total amount paid into both annuities. At the end of the payout period of the immediate annuity, the deferred annuity should approximate the original principal contributed to both annuities and, depending on the needs of the consumer, the process can be started over or the 17

22 remaining deferred annuity can be annuitized. The split annuity concept can be particularly advantageous with an IRA when the amount apportioned to the single-premium deferred annuity is converted to a Roth IRA. (The consumer should consult their tax advisor to determine the total tax costs of such transactions.) Two-Tiered Annuities The two-tiered annuity is a product containing three different values. (1) The tier-one value is the premium accumulated with interest earnings, just like a regular fixed annuity. This value is available to clients who decide to surrender their contracts for a lump sum after the surrender charge period. (2) The surrender value is the tier-one value less any applicable surrender charges. The surrender value is available to clients who decide to surrender their contracts for a lump sum during the surrender charge period. (3) The tier-two value provides a benefit that is typically higher than the tierone value and is only available to clients who annuitize their contracts. Tier-two benefits may include higher interest rates, higher index crediting, bonuses, or other benefits that encourage the client to annuitize, thereby leaving assets longer with the insurance company. In most two-tier annuity products, clients must wait a certain period of time before they can access these higher tier-two values. There are advantages and disadvantages to two-tiered annuities. Some of the advantages are: Clients may receive higher lifetime benefits under a two-tier product than under a regular deferred or immediate annuity that is annuitized this can be advantageous to a client who has a need for a lifetime stream of income. Due to the design and pricing of two-tier products, tier-one credited rates could be higher than a non-tiered deferred annuity as a result of better participation rates, caps, or fees. Some of the disadvantages could be: These products may not be suitable for clients who have short-term liquidity needs or who have a desire to pass on lump sum benefits to their heirs. 18

23 Clients usually have to wait a specified period of time before receiving the higher tier-two values. Remember, annuitization is required to receive those values, which spreads the benefits out over a longer period of time. Usually the annuitization must occur over at least a ten-year period. ACCUMULATION PHASE AND PAYOUT PHASE Annuities have both an accumulation phase and a payout phase Premiums and interest build during the accumulation phase and the company pays the accumulated value in the payout phase (annuitization). The value of the annuity depends on market conditions and interest rates. The payout can be a partial withdrawal, complete withdrawal, a death benefit, or a series of guaranteed payments. Most annuities permit withdrawal of some of the accumulated value before the payout phase begins. Some contracts provide a free ten percent annual withdrawal. If the contract owner withdraws money before the payout phase begins, they will probably have to pay a surrender charge. Surrender charges are usually high during the first few years of the contract, so they could lose money if they withdraw any of the accumulated value early. Companies may lower or eliminate the penalties in later years. Withdrawing the entire accumulated value early, of course, cancels the annuity. Section addresses Disclosure of Availability of Waiver of Surrender Charges thusly: An insurer that offers to waive surrender charges shall provide reasonable notice of that offer to the insurer s prospective or current contract holders. The notice may be provided by any available means, including a disclosure document or by display on a link that is prominently placed on the insurer s Internet website. ANNUITY SETTLEMENT OPTIONS Settlement options are the methods by which an insurance company pays annuity proceeds to the annuitant, contract owner, or beneficiary(ies). Annuities offer a variety of options to provide annuitants with long-term income payments. Regardless of the type of settlement option, the annuitant may choose to receive payments monthly, quarterly, semi-annually, or annually. In addition to the settlement options listed below, many annuities offer guaranteed income streams without the need for annuitization. 19

24 With most annuity settlement options the insurer is assuming certain risks that they will charge for by reducing the income stream an amount actuarially calculated to cover the risk. With this in mind it should be fairly easy to understand that the more risk an insurer assumes in an annuity settlement option, the lower the income stream will be. Another way to say it would be that the more certainty the annuitant wants as to length of income distribution benefit, the lower the income benefit will be. The most common risk assumption on the part of an insured in an annuity settlement option is mortality risk. With an annuity settlement option that involves a mortality assumption, the insurer is exposed to the risk that the annuitant will outlive their life expectancy. This is the flip side of the mortality risk that an insurer is exposed to when selling life insurance. When an insurer sells life insurance they do medical underwriting to help estimate the proposed insured s life expectancy. Generally, with annuities there is no medical underwriting unless the consumer is looking at an impaired risk annuity. The impaired risk annuity is a single premium immediate annuity that is not widely available and usually has a minimum issue age of 65 or older and minimum issue amount of $100,000 or more. The impaired risk annuity is only offered with the straight life settlement option (with no period certain or refund). The insurer undertakes medical underwriting to determine if the annuitant has a reduced life expectancy (hence the term, impaired risk ) and will increase the income payments due to the shortened lifespan of the annuitant. When choosing an annuity settlement option, the annuitant(s) has options to choose from. Below we will describe the annuity settlement options that are available. It is likely that a particular annuity carrier will not offer all of the settlement options discussed. Note: When selecting an annuity settlement the client should know that they would be annuitizing the annuity. The decision to elect a settlement option should be studied carefully and the client should know that the decision is irrevocable. Straight Life Settlement Option If an annuity owner is planning on living a very long time, they might want to opt for a straight life annuity, which offers high reward but at high risk. The straight life settlement option (or life only settlement option) provides for payments that continue as long as the annuitant remains living. Once the annuitant passes away, payments cease. There is no residual benefit paid to another annuitant or beneficiary even if the total contract value was not paid out during the annuitant s life. This option is most suitable for the single individual who does not desire to leave income or assets from the annuity to a beneficiary. 20

25 The straight life settlement option provides the highest amount of income payment of all settlement options requiring a mortality assumption on the part of the insurer and the annuitant cannot outlive the income. The disadvantage of the straight life settlement option is that there is no residual income or benefit from the annuity left to the beneficiary upon the death of the annuitant. The life only option is viable for married couples as long as the overall retirement plan provides income for the spouse if they survive the annuitant. Life Only With Guaranteed Minimum Option or Cash Refund The refund life annuity option and the straight life annuity option differ in one key aspect. If the original purchase price of the annuity has not been exhausted by the time the annuitant passes away, the balance is paid to the annuity s beneficiary. Payment can be made in two ways: (1) life with cash refund or (2) life with installment refund. Using the life with cash refund option, a lump sum of the balance is paid to the beneficiary. With the life with installment refund payout scenario, monthly installments are paid to the beneficiary until the balance is exhausted. This settlement option adds to the life only option a guarantee that payments will continue for the longer of the annuitant s life or until the amount of total premiums paid into the annuity has been paid out (either to the annuitant or the beneficiary). If the annuitant dies before the total of income payments received equals or exceeds the total premiums paid into the annuity the income payments continue to the beneficiary until the total of all premiums has been paid out. In comparing the lump sum refund versus continuing the stream of benefit payments, obviously the addition of the guaranteed minimum benefit to a life only settlement option will reduce the amount of the benefit payment since the annuity company is now exposed to a greater total payout in the event of the early death of the annuitant. Joint Life Annuity/Survivorship When a joint and survivor annuity contract is issued to and for a couple (usually husband and wife), or if the annuity was issued on a single annuitant and the annuitant opts for a joint and survivor annuity settlement option, the contract provides a payout for as long as either of the two annuitants remain living. The amount of each payment is less than if it were based on a single individual s life since the annuity company s mortality risk has increased. The greater the difference in age between the two annuitants, the greater the reduction of income benefit versus the life only or straight life option. Clearly for a married couple, the joint life settlement option addresses a concern that is very prevalent in retirement planning for a couple. Many annuities allow the annuitants to choose to have payments either remain the same or decrease 21

26 after the death of the first annuitant. For example, they may decide that after the death of the first annuitant, the payments to the surviving annuitant are reduced to two-thirds of the amount paid while both annuitants were alive. This settlement option is commonly called a joint and survivor or reduced joint life settlement option. By opting to have the benefit drop by one-third upon the death of the first annuitant to die the annuity will pay a higher benefit while both annuitants are alive (versus a straight joint option). Some annuities allow the annuitants to choose the percentage of reduction in benefits to be paid to the surviving annuitant after the death of the primary annuitant. The standard choices are a remaining benefit to the surviving annuitant of 50 percent, 66 2/3 percent, or 75 percent of the amount paid while both annuitants were alive. The joint life settlement option does reduce the income benefit more than straight life because the insurer is assuming more mortality risk. In addition if the secondary annuitant dies before the primary annuitant, the primary annuitant is stuck at the lower income amount for the remainder of their life. Joint and Contingent Survivor Settlement Option Some annuities allow a twist on the joint and survivor option that will reduce the payment to the secondary or contingent annuitant if the primary annuitant dies first. But if the secondary annuitant dies first, the income benefit remains unreduced for the remainder of the primary annuitant s life. This settlement option can be useful if, due to health or age, the secondary annuitant is not expected to outlive the primary annuitant. Life Annuity With Period Certain The life with period certain settlement option adds a specified period of time to the life only option. The period certain option usually provides a larger minimum payout than the life with guaranteed minimum option. Life with period certain means payments will continue for the rest of the annuitant s life but for no less than the specified period (period certain) chosen, even if the annuitant dies before the end of that period. If the annuitant does die before the end of the period certain, the beneficiary will continue to receive the income payments for the remainder of the period. Period Certain Settlement Option With the period certain settlement option the insurer does not assume any mortality risk. The period certain settlement option guarantees the annuitant that the income benefit will be paid for the specified number of years chosen by the annuitant. If the annuitant dies before the end of the years chosen by the annuitant, the beneficiary continues to receive payments for the remainder of the 22

27 period certain. Most annuity contracts only allow annuitization over a limited choice of certain periods (3 years, 5 years, 10 years, etc.). Obviously the longer the period certain chosen, the smaller the monthly income benefit paid by the annuity. The period certain settlement option usually pays a larger monthly income benefit than any of the life assumption settlement options. The exception to this would be if the period certain chosen were longer than the life expectancy of the annuitant. The annuitant has more control over determining the amount of the monthly income benefit by choosing a shorter or longer period certain. On the flip side, since there is no assumption of mortality risk by the insurer, the annuitant can outlive the income benefit. Amount Certain Settlement Option The amount certain settlement option is similar to the period certain option in that there is no mortality risk assumed by the insurer. The difference between amount certain and period certain is that with the amount certain, the annuitant can choose the amount of the monthly income benefit and the insurer will back into the length of time that the benefit will be paid. The amount certain option is sometimes called the installments of designated amounts settlement option. The advantage of the amount certain settlement option is that the annuitant can tailor the income benefit to match a specific financial need or obligation for a specific period of time. However, since there is no assumption of mortality risk by the insurer the annuitant can outlive the income benefit. Investment Income Settlement Option The investment income settlement option makes payments of earnings on the annuity account principal only for the life of the annuitant. The principal of the annuity is left intact and upon the death of the annuitant, the principal amount is left to the beneficiary. The beneficiary can then choose to surrender the annuity or elect another settlement option. This settlement option minimizes the income benefits to the annuitant and maximizes the benefits to the beneficiary. The advantage of this settlement option is that it leaves a larger benefit and more flexibility for the beneficiary than other settlement options. There is no mortality risk assumed by the insurer during the annuitant s life so there is no mortality charge levied against the principal. The disadvantage of this option is that it only provides earnings on the annuity principal to the annuitant. 23

28 SUITABILITY Section (Suitability of Annuity Product Required) addresses the suitability of annuity products, stating that the purchase or exchange of an annuity must be suitable for the consumer. To that end, the Texas Department of Insurance offers the following guidelines that can assist with the decision as to whether an annuity is really suitable for your prospect. Is An Annuity Right For Your Client? Is the client retired? An annuity is probably not a good option because it can take years for an annuity to become profitable. If the client wants to use an annuity for retirement income, it is best to purchase it at least five to ten years prior to retirement. If the client doesn t have any other investments or savings accounts An annuity is probably not a good place to start. It is a good idea for investors to have some investments that can be converted to cash in case of an emergency or other need. Penalties may apply often as high as twenty-five percent if the client withdraws money from an annuity early. If the client wants to have a guaranteed income stream for retirement Annuities that make fixed monthly payments for the remainder of the client s lifetime can be a good option. If the client has the financial discipline to keep the annuity for a long time It can be a good option. But it is not a good option of they want or need to cancel it after only a few years. Not only will they have to pay a penalty for cashing in early, but it will probably increase their tax obligations as well. If the client is in a high-income tax bracket now, but expects to be in a lower tax bracket in the future An annuity can be a good choice because earnings are tax-deferred. If a client contributes to an annuity while in a high tax bracket and receives payments while in a lower one, they will probably pay less in taxes than they would with other investments. Consumers should analyze the amount of money they are willing to invest in an annuity as well as how much of a monetary risk they are willing to take. The NAIC offers some further advice that consumers may ask themselves. As an agent, you would be well versed to take these questions into consideration. How much retirement income will the annuitant need in addition to what they will get from Social Security and any pension plan they may have? 24

29 Will the annuitant need supplementary income for others in addition to themselves? How long does the annuitant plan on leaving money in the annuity? When does the annuitant plan on needing income payments? Will the annuity allow the annuitant to gain access to their money when they need it? Does the annuitant want a fixed annuity with a guaranteed interest rate and little or no risk of losing the principal? Or do they want a variable annuity with the potential for higher earnings that are not guaranteed with the possibility that they may risk losing principal? Or are they somewhere in between and willing to take some risks with an equity-indexed annuity? 25

30 CHAPTER 2 REVIEW QUIZ (Answers are in the back of the text) 1) All variable annuities must be registered with the: a) NAIC. b) SEC. c) TDI. d) AE. 2) Premiums paid for fixed annuities are invested with the insurance company s: a) General funds. b) Separate accounts. c) Sub-accounts. d) Holding accounts. 3) A variable annuity fluctuates in value according to the performance of its underlying investments: a) Holding accounts. b) General funds. c) Separate or sub-accounts. d) The stock market. 4) The required buyer s guide provides annuity applicants with educational information regarding: a) Annuity types and features. b) The current status of their contract. c) Changes that have occurred to their account. d) Disclosures. 5) Disclosure documents must be sent to an annuity contract owner: a) Daily. b) Weekly. c) Monthly. d) Yearly. 26

31 CHAPTER 3 NAIC SUITABILITY IN ANNUITY TRANSACTIONS MODEL REGULATION H.R. 4173, Dodd-Frank Wall Street Reform and Consumer Protection Act, was introduced to promote the financial stability of the United States by improving accountability and transparency in the financial system, to protect consumers from abusive financial services practices, and for other purposes. The July 2010 passage of this bill ensured that regulatory control over fixed indexed annuities would remain under the control of state insurance commissions. Individual states are required under the bill to adopt regulations that substantially meet or exceed the minimum requirements established by the 2010 NAIC Suitability in Annuity Transactions Model Regulation by June 16, A regulatory framework that holds insurers responsible for compliance with suitability requirements was established by the NAIC. In essence, it requires fixed annuity producers to follow similar stringent suitability standards to those imposed upon variable annuity producers. In summary, the NAIC Annuity Suitability Model establishes: New suitability requirements; New product disclosure requirements; New independent suitability review; and New supervision and recordkeeping requirements. Texas Insurance Code, Title 7, Subtitle A, Chapter 1114 addresses policy replacement, regulating the activities of insurers and agents with respect to the replacement of existing life insurance and annuities. Following, we will present the NAIC Model Regulation requirements and the corresponding Texas statutes that address that particular regulation s requirement. Note: In several sections of the following Model Regulation, you will notice there are blanks where reference to state laws would be inserted and/or choice would be made by state legislators. 27

32 NAIC SECTION 1 PURPOSE A. The purpose of this regulation is to require insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in a transaction involving annuity products so that unsuitable sales are deterred and the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed. B. Nothing herein shall be construed to create or imply a private cause of action for a violation of this regulation. NAIC SECTION 2 SCOPE This regulation shall apply to any recommendation to purchase, exchange or replace an annuity made to a consumer by an insurance producer, or an insurer where no producer is involved, that results in the purchase, exchange or replacement recommended. NAIC SECTION 3 AUTHORITY This regulation is issued under the authority of [insert reference to state enabling legislation]. NAIC SECTION 4 EXEMPTIONS Unless otherwise specifically included, this regulation shall not apply to recommendations involving: A. direct response solicitations by insurers where there is no recommendation based on information collected from the consumer pursuant to this regulation; B. contracts used to fund: 1) any of the following, unless there is a recommendation to an individual plan participant regarding an annuity in which case this regulation does apply with respect to the recommendation: a) an employee pension or welfare benefit plan that is covered by the Employee Retirement and Income Security Act (ERISA); b) a plan described by sections 401(a), 401(k), 403(b), 408(k), or 408(p) of the Internal Revenue Code (IRC), as amended, if established or maintained by an employer; 28

33 c) a government or church plan defined in section 414 of the IRC, a government or church welfare benefit plan, or a deferred compensation plan of a state or local government or tax exempt organization under section 457 of the IRC; d) a nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor; 2) settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process; or 3) formal prepaid funeral contracts. TDI Section Applicability; Exemptions a) This chapter applies to any recommendation to purchase, replace, or exchange an annuity that: 1) is made to a consumer by an agent, or an insurer if an agent is not involved; and 2) results in the recommended purchase, replacement, or exchange. b) Unless otherwise specifically included, this chapter does not apply to transactions involving: 1) direct response solicitations if there is no recommendation based on information collected from the consumer under this chapter; or 2) contracts used to fund: (A) an employee pension benefit plan or employee welfare benefit plan covered by the Employee Retirement Income Security Act of 1974 (29 U.S.C. Section 1001 et seq.); (B) a plan described by Section 401(a), 401(k), 403(b), 408(k), or 408(p), Internal Revenue Code of 1986, if established or maintained by an employer; (C) a government or church plan, as defined by Section 414, Internal Revenue Code of 1986, a government or church welfare benefit plan, or a deferred compensation plan of a state or local government or tax exempt organization described under Section 457, Internal Revenue Code of 1986; (D) a nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor; (E) settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process; or (F) prepaid funeral benefits contracts, as defined by Chapter 154, Finance Code. 29

34 TDI Section Applicability; Exemptions a) Except as otherwise specifically provided by this chapter, this chapter does not apply to transactions involving: 1) credit life insurance; 2) group life insurance or group annuities for which there is no direct solicitation of individuals by an agent; 3) life insurance and annuities used to fund prepaid funeral benefits contracts, as defined by Chapter 154, Finance Code; 4) an application to: (A) exercise a contractual change or a conversion privilege made to the insurer that issued the existing policy or contract; (B) replace an existing policy or contract by the insurer that issued the existing policy or contract under a program filed with and approved by the commissioner; or (C) exercise a term conversion privilege among corporate affiliates; 5) life insurance proposed to replace life insurance under a binding or conditional receipt issued by the same insurer; 6) a policy or contract used to fund: (A) an employee pension benefit plan or employee welfare benefit plan that is covered by the Employee Retirement Income Security Act of 1974 (29 U.S.C. Section 1001 et seq.); (B) a plan described by Section 401(a), 401(k), or 403(b), Internal Revenue Code of 1986, if established or maintained by an employer; (C) a government or church plan, as defined by Section 414, Internal Revenue Code of 1986, a government or church welfare benefit plan, or a deferred compensation plan of a state or local government or tax exempt organization described under Section 457, Internal Revenue Code of 1986; or (D) a nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor; 7) new coverage provided under a life insurance policy or contract if the cost is borne wholly by the insured's employer or by an association of which the insured is a member; 8) an existing life insurance policy that is a nonconvertible term life insurance policy scheduled to expire in five years or less and that cannot be renewed; 9) immediate annuities purchased with proceeds from an existing contract; or 10) structured settlements. 30

35 b) Notwithstanding Subsection (a)(6), this chapter applies to policies or contracts used to fund any plan or arrangement that is funded solely by contributions an employee elects to make, whether on a pre-tax or after-tax basis, if: 1) the insurer has been notified that plan participants may choose from among two or more insurers; and 2) there is a direct solicitation of an individual employee by an insurance agent for the purchase of a contract or policy. c) Group life insurance or group annuity certificates marketed through direct response solicitation are subject to Section d) Notwithstanding Subsection (a)(9), immediate annuities purchased with proceeds from an existing policy are not exempted from the requirements of this chapter. e) For the purpose of Subsections (a), (b), and (c), "direct solicitation" does not include a group meeting held by an insurance agent solely for the purpose of: (1) educating or enrolling individuals; or (2) if initiated by an individual member of the group, assisting with the selection of investment options offered by a single insurer in connection with enrolling that individual. Note: Most 403(b) retirement annuities are sold to school employees where the employee only funds the annuity through a voluntary election. In this case if the employees can choose among the annuities of two or more insurers and an agent directly solicits the employee, the solicitation is subject to this law. The term notwithstanding from above can be explained as follows: If something is true notwithstanding something else, it is true in spite of that other thing. ~ Merriam Webster Dictionary NAIC SECTION 5 DEFINITIONS A. Annuity means an annuity that is an insurance product under state law that is individually solicited, whether the product is classified as an individual or group annuity. B. Continuing education credit or CE credit means one continuing education credit as defined in [insert reference in state law or regulations governing producer continuing education course approval]. C. Continuing education provider or CE provider means an individual or entity that is approved to offer continuing education courses pursuant to [insert reference in state law or regulations governing producer continuing education course approval]. 31

36 D. FINRA means the Financial Industry Regulatory Authority or a succeeding agency. E. Insurer means a company required to be licensed under the laws of this state to provide insurance products, including annuities. F. Insurance producer means a person required to be licensed under the laws of this state to sell, solicit or negotiate insurance, including annuities. G. Recommendation means advice provided by an insurance producer, or an insurer where no producer is involved, to an individual consumer that results in a purchase, exchange or replacement of an annuity in accordance with that advice. H. Suitability information means information that is reasonably appropriate to determine the suitability of a recommendation, including the following: 1) Age; 2) Annual income; 3) Financial situation and needs, including the financial resources used for the funding of the annuity; 4) Financial experience; 5) Financial objectives; 6) Intended use of the annuity; 7) Financial time horizon; 8) Existing assets, including investment and life insurance holdings; 9) Liquidity needs; 10) Liquid net worth; 11) Risk tolerance; and 12) Tax status. NAIC SECTION 6 DUTIES OF INSURERS AND OF INSURANCE PRODUCERS Section 6 pertains to suitability requirements. Insurers and insurance producers must have reasonable grounds to believe that the annuity recommendation is suitable based on information disclosed by the consumer. In regard to policy replacement, part of determining suitability is to determine if the product being sold to replace an existing product has a benefit or enhancement that the consumer does not possess in their current product. Whether or not the enhancement is of value to the consumer is a decision they can only make when they understand the full cost (monetary and otherwise) of the replacement transaction. If the consumer believes that the new product will 32

37 allow them benefits they don t currently have and they feel that these benefits are worth the cost of the transaction, then they have made a valued decision. If the consumer has had an annuity replacement within the previous three years, the potential is high that they will bail out of the product being sold to them today while a surrender charge is still effective. Since 2008, part of the regulations for the suitability of deferred variable annuities has required additional scrutiny of any annuity replacement where the consumer has had an annuity replacement within the previous 36 months. A. In recommending to a consumer the purchase of an annuity or the exchange of an annuity that results in another insurance transaction or series of insurance transactions, the insurance producer, or the insurer where no producer is involved, shall have reasonable grounds for believing that the recommendation is suitable for the consumer on the basis of the facts disclosed by the consumer as to his or her investments and other insurance products and as to his or her financial situation and needs, including the consumer s suitability information, and that there is a reasonable basis to believe all of the following: 1) the consumer has been reasonably informed, in general terms, 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; 2) the consumer would benefit from the purchase of the annuity certain features of the annuity, such as tax-deferred growth, annuitization or death or living benefit; 3) 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 his or her suitability information; and 4) in the case of an exchange or replacement of an annuity, the exchange or replacement is suitable including taking into consideration whether: a) 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; b) the consumer would benefit from product enhancements and improvements; and 33

38 c) the consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 36 months. B. Prior to the execution of a purchase or exchange of an annuity resulting from a recommendation, an insurance producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain the consumer s suitability information. C. An insurer is ultimately responsible for compliance with this regulation. If a violation occurs, either because of the action or inaction of the insurer or its insurance producer, the insurer is responsible for taking appropriate corrective action, including, but not limited to, canceling a transaction that is not suitable, and is subject to sanctions and penalties, subject to Section 8 of this regulation. D. Except as permitted under subsection E, an insurer shall not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity is suitable based on the consumer s suitability information. The penalty for a violation of this subsection is subject to Section 8C of this regulation. 1) E. 1) Except as provided under paragraph (2) of this subsection, neither an insurance producer, nor an insurer where no producer is involved, shall have any obligation to a consumer under Subsection A or D related to any annuity transaction if a consumer: a) refuses to provide relevant information requested by the insurer or insurance producer, or decided to enter into an annuity transaction that is not based on a recommendation of the insurer or insurance producer, but there is a reasonable basis to believe the annuity transaction is suitable; or b) fails to provide complete or accurate information. 2) An insurer or insurance producer s recommendation subject to Paragraph (1) shall be reasonable under all the circumstances actually known to the insurer or insurance producer at the time of the recommendation. 3) Where the customer refuses to provide suitability information, the insurance producer, or an insurer where no insurance producer is involved, must provide the customer with an explanation of the purpose of requesting the suitability information and the potential repercussions of not providing the suitability information. F. An insurance producer or, where no insurance producer is involved, the responsible insurer representative, shall at the time of sale: 1) make a record of any recommendation subject to section 6A of this regulation; 2) obtain a customer signed statement documenting a customer s refusal to provide suitability information, if any; and 34

39 3) 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 insurer producer s or insurer s recommendation. G 1) An insurer shall establish a supervision system that is reasonably designed to achieve the insurer s and its insurance producers compliance with this regulation including, but not limited to, the following: a) the insurer shall 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; b) the insurer shall establish standards for insurance producer product training and shall maintain reasonable procedures to require its insurance producers to comply with the requirements of section 7 of this regulation; c) the insurer shall provide product-specific training and training materials which explain all material features of its annuity products to its insurance producers; d) the insurer shall maintain reasonable procedures to confirm consumer suitability information that supports a recommendation to the extent reasonably appropriate to identify, and to deter, insurance producer submission of inaccurate information; a) (i) the insurer shall maintain reasonable procedures for review of each recommendation, including each insurance producer recommendation, that are reasonably designed to ensure that there is a reasonable basis to determine that a recommendation is suitable. An insurer s procedures under this paragraph may be accomplished electronically applying a system of selection criteria to identify selected recommendations for review that is reasonably designed to ensure that there is a reasonable basis to determine that recommendations are suitable. Such an electronic system may be designed to require staff review only of those transactions identified for staff review by the selection criteria. (ii) Nothing in this subparagraph: (I) (II) restricts the FINRA member broker-dealer safe harbor provided under paragraph (2); or prevents an insurer from contracting as provided under paragraph (3) for performance of the procedures required under this subparagraph; b) the insurer shall maintain reasonable procedures to detect recommendations that are not suitable. This may include, but is not 35

40 limited to, systematic customer surveys, interviews, confirmation letters and programs of internal monitoring; c) the insurer shall maintain reasonable procedures for examination of its insurance producers and their affiliated insurance agencies at reasonable periodic intervals. The examination shall be reasonably designed to assist in detecting and preventing violations of this regulation. Nothing in this paragraph prohibits an insurer from accepting an examination conducted, and report certified, by an independent qualified firm or contracting under paragraph (3) for performance of the examination. Any such examination shall comply with the requirements of this subparagraph; and d) the insurer shall annually provide a report to senior management, including to the senior manager responsible for audit functions, which details a review, with appropriate testing, reasonably designed to determine the effectiveness of the supervision system, the exceptions found, and corrective action recommended, if any. 2) (a) A FINRA member broker-dealer supervision system that complies with FINRA suitability rules shall satisfy the insurer s supervision requirements under subsection G. b) An insurer shall: (i) monitor the FINRA member broker-dealer, using information collected in the normal course of the insurer s business; and (ii) provide to the FINRA member broker-dealer information and reports that are reasonably appropriate to assist the FINRA member broker-dealer to maintain its supervision system. 3) (a) Nothing in this subsection restricts an insurer from contracting for performance of a function required under this subsection. An insurer is subject to, and is required to, comply with this subsection G regardless of whether the insurer contracts for performance of a function and regardless of the insurer s compliance with subparagraph (b) of this paragraph. b) An insurer s supervision system under paragraph (1) shall include reasonable supervision of contractual performance under this subsection. This includes, but is not limited to, the following: (i) reasonable monitoring and, as appropriate, audits to assure that the contracted function is properly performed; and (ii) annually obtaining a certification from a senior manager who has responsibility for the contracted function that the manager has a reasonable basis to represent, and does represent, that the function is properly performed. 36

41 4) An insurer is not required to include in its system of supervision an insurance producer s recommendations to consumers of products other than the annuities offered by the insurer. H. An insurance producer shall not dissuade, or attempt to dissuade, a consumer from: 1) truthfully responding to an insurer s request for confirmation of suitability information; 2) filing a complaint; or 3) cooperating with the investigation of a complaint. I. A registered representative recommendation of an annuity that is a security that complies with the FINRA rules pertaining to suitability shall satisfy the requirements under this section for the recommendation of annuities. However, nothing in this subsection shall limit the insurance commissioner s ability to enforce the provisions o this regulation. TDI Section Suitability of Annuity Product Required (a) In recommending to a consumer the purchase of an annuity or the exchange of an annuity that results in another insurance transaction or series of insurance transactions, the agent, or the insurer if an agent is not involved, must have a reasonable basis to believe that: 1) the recommendation is suitable for the consumer on the basis of the facts disclosed by the consumer as to the consumer s investments and other insurance products and as to the consumer s financial situation and needs, including the consumer s suitability information; 2) the consumer has been reasonably informed of various features of the annuity, such as the potential surrender period and the surrender charge, any potential tax penalty if the consumer sells, exchanges, surrenders, or annuitizes the annuity, mortality and expense fees, investment advisory fess, potential charges for and features of riders, limitations on interest returns, insurance and investment components, and market risk; 3) the consumer would benefit from certain features of the annuity, such as tax-deferred growth, annuitization, or a death or living benefit; 4) the particular annuity as a whole, the underlying subaccounts to which funds are allocated at the time of the purchase or exchange of the annuity, and any riders or similar product enhancements are suitable, and, in the case of an exchange or replacement, the transaction as a whole is suitable, for the particular consumer based on the consumer's suitability information; and 37

42 5) in the case of an exchange or replacement of an annuity, the exchange or replacement is suitable, including taking into consideration whether the consumer: A. 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 or similar product enhancements; B. would benefit from product enhancements and improvements; and C. has had another annuity exchange or replacement, and in particular, an exchange or replacement in the preceding 36 months. (b) Before the execution of a purchase, exchange, or replacement of an annuity resulting from a recommendation, an agent, or an insurer if an agent is not involved, shall make reasonable efforts to obtain the consumer's suitability information. (c) Except as permitted by Subsection (d), an insurer may not issue an annuity recommended to a consumer unless the insurer has a reasonable basis to believe the annuity is suitable based on the consumer's suitability information. (d) Subject to Subsection (e), an agent or insurer does not have any obligation to a consumer related to an annuity transaction if: 1) the consumer refuses to provide suitability information requested by the agent or insurer; 2) the agent or insurer does not make a recommendation; 3) the agent or insurer makes a recommendation later found to have been prepared based on inaccurate material information provided by the consumer; or 4) the consumer decides to enter into a transaction that is not based on a recommendation of the agent or insurer. (e) An insurer's issuance of an annuity under circumstances described by Subsection (d) must be reasonable under all circumstances actually known to the insurer at the time the annuity is issued. (f) An agent, or an insurer if an agent is not involved, shall at the time of sale of an annuity: 1) make a record of any recommendation made by the agent or insurer that is subject to Subsection (a); 2) obtain a customer-signed statement documenting the customer's refusal, if any, to provide suitability information; and 38

43 3) obtain a customer-signed statement acknowledging that an annuity transaction is not recommended if the customer decides to enter into an annuity transaction that is not based on the agent's or insurer's recommendation. Note: Section (Disclosure of Availability of Waiver of Surrender Charges) states that an insurer that offers to waive surrender charges as described by Section (b)(4) shall provide reasonable notice of that offer to the insurer s prospective or current contract holders. Section (b)(4) states that it is an unfair method of competition or an unfair or deceptive act or practice in the business of insurance to issue or deliver or to permit an agent, officer, or employee to issue or deliver as an inducement to insurance a special or advisory board contract or any other contract promising returns or profits. The notice may be provided by any available means, including a disclosure document or by display on a link that is prominently placed on the insurer s Internet website. TDI Section Supervision System (a) Each insurer shall establish supervision that is reasonably designed to achieve the insurer's and the insurer's agents' compliance with this chapter. (b) An insurer may comply with Subsection (a) by establishing and maintaining the insurer's own supervision system under which, at a minimum, the insurer: (1) maintains reasonable procedures to inform the insurer's agents of the requirements of this chapter and incorporates the requirements of this chapter into relevant agent training manuals; (2) establishes standards for agent product training and maintains reasonable procedures to require the insurer's agents to comply with the requirements of Section ; (3) provides product-specific training and training materials that explain all material features of the insurer's annuity products to the insurer's agents; (4) maintains procedures to review each recommendation electronically, physically, or otherwise before the issuance of an annuity that: (A) are designed to ensure that there is a reasonable basis to determine that a recommendation is suitable; and (B) may: (i) include the application of a screening system to identify selected transactions for additional review; and 39

44 (ii) be designed to require additional review only of those transactions identified for additional review by the selection criteria; (5) maintains reasonable procedures, such as confirmation of consumer suitability information, systematic customer surveys, interviews, confirmation letters, and programs of internal monitoring, to detect recommendations that are not suitable, which may involve applying sampling procedures or confirming suitability information after the issuance or delivery of the annuity; and (6) annually provides a report to the insurer's senior management, including to the senior manager responsible for audit functions, that details a review, with appropriate testing, reasonably designed to determine the effectiveness of the supervision system, the exceptions found, and any corrective action taken or recommended. (c) This subsection does not prohibit an insurer from contracting for the performance of a function, including maintenance of procedures, required by Subsection (b). An insurer's supervision system under Subsection (b) must include the supervision of contractual performance under this subsection that includes, at a minimum: (1) annually obtaining certification that complies with Section from a senior manager who represents that the contracted function is properly performed; and (2) monitoring and, as appropriate, conducting audits to ensure that the contracted function is properly performed. (d) An insurer is not required by this section to include in the supervision system an agent's recommendations to consumers of products other than the annuities offered by the insurer. (e) An agent may not dissuade, or attempt to dissuade, a consumer from: (1) truthfully responding to an insurer's request for confirmation or suitability information; (2) filing a complaint; or (3) cooperating with the investigation of a complaint. Note: A person may not provide a certification under Section (c)(1) above unless the person is a senior manager with responsibility for the delegated functions and has a reasonable basis for making the certification. (Sec Certification Requirements) 40

45 TDI Section Duties of Insurers That Use Agents (a) An insurer that uses an agent shall comply with this section. (b) Each insurer shall maintain a system of supervision and control to ensure compliance with the requirements of this chapter. Under the system, the insurer must, at minimum: (1) inform its agents of the requirements of this chapter and incorporate the requirements of this chapter into all relevant agent training manuals prepared by the insurer; (2) provide each agent a written statement of the insurer's position with respect to the acceptability of replacements and provide guidance to the agent as to the appropriateness of these transactions; (3) review the appropriateness of each replacement transaction that the agent does not indicate is in accord with Subdivision (2); (4) implement procedures to confirm that the requirements of this chapter have been met; and (5) implement procedures to detect transactions that are replacements of existing policies or contracts by the existing insurer but that have not been reported as such by the applicant or agent. (c) Compliance with Subsection (b)(5) may include systematic customer surveys, interviews, confirmation letters, or programs of internal monitoring. (d) Each insurer must have the capacity to monitor each agent's life insurance policy and annuity contract replacements for that insurer. The insurer shall maintain records regarding the monitoring and shall produce and make the records available to the department on request. The capacity to monitor under this subsection must include the ability to produce records for: (1) each agent's life insurance replacements, including financed purchases, as a percentage of the agent's total annual sales for life insurance; (2) the number of lapses of policies by the agent as a percentage of the agent's total annual sales for life insurance; (3) each agent's annuity contract replacements as a percentage of the agent's total annual annuity contract sales; (4) the number of transactions that are unreported replacements of existing policies or contracts by the existing insurer detected by the insurer's monitoring system as required by Subsection (b)(5); and (5) replacements, indexed by replacing agent and existing insurer. (e) Each insurer shall require, with or as a part of each application for life insurance or an annuity, a signed statement by both the applicant and the agent as to whether the applicant has existing policies or contracts. 41

46 (f) Each insurer shall require, with each application for life insurance or an annuity that indicates an existing policy or contract, a completed notice regarding replacements. (g) If the applicant has existing policies or contracts, each insurer must be able to produce, for at least five years after the date of termination or expiration of the proposed policy or contract, copies of any sales material required by Section (g), the basic illustration and any supplemental illustrations related to the specific policy or contract that is purchased, and the agent's and applicant's signed statements with respect to financing and replacement. (h) The insurer shall ascertain that the sales material and illustrations required by Section (g) meet the requirements of this chapter and are complete and accurate for the proposed policy or contract. (i) If an application does not meet the requirements of this chapter, the insurer shall notify the agent and applicant and fulfill the outstanding requirements. (j) The insurer shall maintain records required by this section in paper, photographic, microprocess, magnetic, mechanical, or electronic media or by any process that accurately reproduces the actual document. TDI Section Duties of Insurers Regarding Direct Response Solicitations (a) In the case of an application initiated as a result of a direct response solicitation, the insurer shall require submission of a statement asking whether the applicant, by applying for the proposed policy or contract, intends to replace, discontinue, or change an existing policy or contract. The statement may be included with, or submitted as part of, each completed application for a policy or contract. If the applicant indicates a replacement or change is not intended or if the applicant fails to respond to the statement, the insurer shall send the applicant, with the policy or contract, a notice, in a form adopted or approved by the commissioner, regarding replacement. (b) If the insurer has proposed the replacement or if the applicant indicates a replacement is intended and the insurer continues with the replacement, the insurer shall: (1) provide to the applicant or prospective applicant, with the policy or contract, a notice adopted or approved by the commissioner; and (2) comply with the requirements of: (A) section (c), if the applicant furnishes the names of the existing insurers; and (B) sections (d), (e), and (f). (c) In a situation described by Subsection (b)(1), the insurer may use a notice that deletes references to the agent, including the agent s signature, and references not applicable to the product being sold or replaced, without having to obtain 42

47 prior approval of the notice from the commissioner. The insurer s obligation to obtain the applicant s signature is satisfied if the insurer can demonstrate that the insurer has made a diligent effort to secure a signed copy of the notice. The requirement to make a diligent effort is deemed satisfied if the insurer includes in the mailing a self-addressed postage prepaid envelope with instructions for the return of the signed notice. NAIC SECTION 7 INSURANCE PRODUCER TRAINING A. An insurance producer shall not solicit the sale of an annuity product unless the insurance producer has adequate knowledge of the product to recommend the annuity and the insurance producer is in compliance with the insurer s standards for product training. An insurance producer may rely on insurer-provided product-specific training standards and materials to comply with this subsection. B. (1) an insurance producer who engages in the sale of annuity products shall complete a one-time four (4) credit training course approved by the department of insurance and provided by the department of insurance-approved education provider. (2) The minimum length of the training required under this subsection shall be sufficient to qualify for at least four (4) CE credits, but may be longer. (3) The training required under this subsection shall include information on the following topics: a) the types of annuities and various classifications of annuities; b) identification of the parties to an annuity; c) how fixed, variable and indexed annuity contract provisions affect consumers; d) the application of income taxation of qualified and non-qualified annuities; e) the primary uses of annuities; and f) appropriate sales practices, replacement and disclosure requirements. (4) Providers of courses intended to comply with this subsection shall cover all topics listed in the prescribed outline and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurer s products. Additional topics may be offered in conjunction with and in addition to the required outline. (5) A provider of an annuity training course intended to comply with this subsection shall register as a CE provider in this State and comply with the rules and guidelines applicable to insurance producer continuing education courses as set forth in [insert reference to State law or regulations governing producer continuing education course approval]. 43

48 (6) Annuity training courses may be conducted and completed by classroom or self study methods in accordance with [insert reference to State law or regulations governing producer continuing education course approval]. (7) Providers of annuity training shall comply with the reporting requirements and shall issue certificates of completion in accordance with [insert reference to State law or regulations governing to producer continuing education course approval]. (8) The satisfaction of the training requirements of another State that are substantially similar to the provisions of this subsection shall be deemed to satisfy the training requirements of this subsection in this State. (9) Insurance producers who hold a life insurance line of authority on the effective date of this regulation shall complete the requirements of this subsection within six (6) months after the effective date of this regulation. Individuals who obtain a life insurance line of authority on or after the effective date of this regulation may not engage in the sale of annuities until the annuity training course required under this subsection has been completed. (10) An insurer shall verify that an insurance producer has completed the annuity training course required under this subsection before allowing the producer to sell an annuity product for that insurer. An insurer may satisfy its responsibility under this subsection by obtaining certificates of completion of the training course or obtaining reports provided by commissioner-sponsored database systems or vendors or from a reasonably reliable commercial database vendor that has a reporting arrangement with approved insurance education providers. TDI Annuity Continuing Education (a) In addition to completing the annuity certification course required by , of this subchapter (relating to Annuity Certification Course), a licensee who sells, solicits, or negotiates a contract for an annuity or represents an insurer in relation to an annuity in this state, or intends to sell, solicit, or negotiate a contract for an annuity or represent an insurer in relation to an annuity in this state must complete at least four hours of department certified annuity continuing education in compliance with this section. (b) If a licensee completes the annuity certification course required by of this subchapter before the expiration of the 12th month of the licensee's licensing period, the continuing education required by this section must be completed by the end of the expiration of that licensing period. If a licensee completes the annuity certification course required by of this subchapter after the 12th month of the licensee's licensing period, the continuing education required by this section must be completed before the expiration of the 12th month in the licensing period following the licensing 44

49 period in which the licensee completed the annuity certification course. (c) For each successive licensing period following the expiration of a licensee's license occurring on or after April 1, 2010, and after a licensee has completed the annuity certification course required by of this subchapter, a licensee subject to the requirements of this section must complete at least four hours of department certified annuity continuing education every twelve months, calculated from the date of the license renewal. (d) The department certified continuing education required under subsection (a) of this section must: (1) comply with the requirements of of this subchapter (relating to Course Criteria); and (2) enhance the knowledge, understanding, and professional competence of the student with regard to one or more of the subjects described (g)(1) - (4) of this subchapter. An individual who obtains a current resident agent license issued by the department on or after April 1, 2010, or who renews a resident agent license on or after April 1, 2010, may not sell, solicit, or negotiate a contract for an annuity or represent an insurer in relation to an annuity in the State of Texas until they have completed the required annuity certification course. (Rule ) TDI Section Agent Training Requirements (a) An agent may not solicit the sale of an annuity product unless the agent has adequate knowledge of the product to recommend the annuity and is in compliance with the insurer's standards for product training. An agent may rely on insurer-provided, product-specific training standards and materials to comply with this subsection. (b) An agent who engages in the sale of annuity products must complete a one-time training course approved by the department and provided by a continuing education provider. (c) The training required by Subsection (b) must be of a length sufficient to qualify for at least four continuing education credits, as determined by the commissioner in accordance with Chapter 4004 and any rules adopted under that chapter, but may be longer. The training required by Subsection (b) may be used to satisfy the continuing education requirements under Subchapters B and E, Chapter 4004, and is not in addition to the continuing education requirements in Section (d) The training required by Subsection (b) must include information on the following topics: (1) the types of annuities and various classifications of annuities; (2) identification of the parties to an annuity; 45

50 (3) how fixed, variable, and indexed annuity contract provisions affect consumers; (4) the application of income taxation of qualified and nonqualified annuities; (5) the primary uses of annuities; and (6) appropriate sales practices, replacement, and disclosure requirements. (e) A provider of a course intended to comply with Subsection (b) must cover all topics listed in Subsection (d) and may not present any marketing information, provide training on sales techniques, or provide specific information about a particular insurer's products. Additional topics may be offered in conjunction with and in addition to the required topics. (f) A provider of a course intended to comply with Subsection (b) must register as a continuing education provider in this state and comply with the rules and guidelines applicable to agent continuing education courses provided by Chapter (g) An annuity training course may be conducted and completed by classroom or self-study methods in accordance with Chapter (h) A provider of annuity training under Subsection (b) must comply with the reporting requirements and issue certificates of completion in accordance with Chapter (i) The satisfaction of the training requirements of another state that are substantially similar to the provisions of this section is considered to satisfy the training requirements of this section. (j) An insurer must verify that an agent has completed the annuity training course required by this section before allowing the agent to sell an annuity product for that insurer. An insurer may satisfy the insurer's responsibility under this section by: (1) obtaining a certificate of completion of the training course or obtaining an appropriate report provided by the department; (2) using a department-sponsored database or vendor; or (3) using a reasonably reliable commercial database vendor that has a reporting arrangement with approved insurance education providers. NAIC SECTION 8 MITIGATION OF RESPONSIBILITY A. The commissioner may order: (1) an insurer to take reasonably appropriate corrective action for any consumer harmed by the insurer s, or by its insurance producer s, violation of this regulation; 46

51 (2) an insurance producer to take reasonably appropriate corrective action for any consumer harmed by the insurance producer s violation of this regulation; and (3) a general agency or independent agency that employs or contracts with an insurance producer to sell, or solicit the sale, of annuities to consumers, to take reasonably appropriate corrective action for any consumer harmed by the insurance producer s violation of this regulation. B. Any applicable penalty under [insert statutory citation] for a violation of section 6A, B, E or F of this regulation may be reduced or eliminated [, according to a schedule adopted by the commissioner,] if corrective action for the consumer was taken promptly after a violation was discovered. C. Any applicable penalty under [insert statutory citation] for an insurer s violation of section 6D of this regulation may be reduced or eliminated [, according to a schedule adopted by the commissioner,] if: (1) a corrective action for the consumer is taken promptly after a violation is discovered; and (2) the insurer reviewed the recommendation and approved issuance of the annuity after consideration of the customer s suitability information as required under section 6G(1)(e) of this regulation, and the documentation received by the insurer reasonably led the insurer to believe that the sale was suitable for the customer at the time the annuity issued. The review and approval may be made applying selection criteria as permitted under section 6G(1)(e) of this regulation. D. The powers vested in the commission through this regulation shall be additional to any other powers vested in him or her under law. TDI Section Mitigation An insurer is responsible for compliance with this chapter. If a violation occurs because of the action or inaction of the insurer or the insurer's agent, the commissioner may: (1) order: (A) the insurer to take reasonable appropriate corrective action for any consumer harmed by the insurer or by the insurer's agent because of a violation of this chapter; or (B) a general agency, independent agency, or the agent to take reasonably appropriate corrective action for any consumer harmed by the agent's violation of this chapter; and (2) impose appropriate sanctions as provided by Section

52 TDI Section Sanctions (a) The commissioner may impose sanctions as provided by Chapter 82 for a violation of this chapter. (b) The commissioner shall reduce or eliminate a sanction for a violation of this chapter otherwise applicable if: (1) corrective action for the consumer was taken promptly by the agent or insurer after a violation was discovered; or (2) the violation was not part of a pattern or practice. The Need for Complete Recordkeeping As a producer in the financial services industry, it is imperative that you become a good record keeper. Not only do regulations require adequate records be retained, but it also helps the producer to better serve the consumer. The process of selling annuities requires the producer to determine suitability of their recommendations to the consumer. As part of the NAIC Annuity Suitability Model Act, a producer must have reasonable grounds for believing that a recommendation to a consumer is appropriate. In order to substantiate the belief that a recommendation was appropriate, the producer needs a record of the information collected from the consumer that was used to formulate the recommendation. Before an annuity transaction is recommended, the agent or insurer must document, in writing, a reasonable basis for making the recommendation. Individual insurers require their own specific forms for their own documentation purposes to meet the requirements of suitability, and transactions will be reviewed at the carrier level to ensure suitability. Producers are in the best position to gather and document accurate consumer information. Without such records, the agent may be found liable for the amount of a claim or suit if one is brought against the agent or the insurer. Records to be kept include: Notes of all conversations; Copies of all correspondence; Copies of all promotional material; Copies of all case materials, including: o Fact finders; o Sales presentations; and o Policy illustrations; 48

53 Copies of applications, new account forms, monthly draft forms; and Copies of service forms, changes of beneficiaries. While the primary purpose of such records is the service of the client, the associated reasons are: To assure the insurance company and other regulators (like the state insurance commissioner or the NASD) that the agent is performing his duties ethically and in compliance with company, industry and governmental guidelines; and To assure that the agent is in a strong position in case of a complaint. NAIC SECTION 9 [OPTIONAL] RECORDKEEPING A. Insurers, general agents, independent agencies and insurance producers shall maintain or be able to make available to the commissioner records of the information collected from the consumer and other information used in making the recommendations that were the basis for insurance transactions for [insert number] years after the insurance transaction is completed by the insurer. An insurer is permitted, but shall not be required, to maintain documentation on behalf of an insurance producer. B. Records required to be maintained by this regulation may be maintained in paper, photographic, micro-process, magnetic, mechanical or electronic media or by any process that accurately reproduces the actual document. TDI Section Recordkeeping Requirements (a) Each agent, independent agency, and insurer shall maintain, or otherwise be able to make available to the commissioner, records of the information collected from the consumer and other information used in making a recommendation that was the basis for a transaction subject to this chapter until the fifth anniversary of the date on which the transaction is completed by the insurer. (b) An insurer may, but is not required to, maintain documentation on behalf of an agent. (c) Records required to be maintained under this section may be maintained in paper, photographic, microprocess, magnetic, mechanical, or electronic media by any process that accurately reproduces the actual document. Texas law requires insurers to monitor each agent s life insurance policy and annuity contract replacement for that insurer. The insurer must maintain records regarding the monitoring and must be able to produce and make the records available to the Department upon request. (Section (d)) 49

54 Insurers are required to retain annuity contracts, any sales material used, illustrations, and agent s and applicant s signed statements for at least five years after the date of termination or expiration of the policy or contract. NAIC SECTION 10 EFFECTIVE DATE The amendments to this regulation shall take effect six (6) months after the date the regulation is adopted or on January 1, 2011, whichever is later. 50

55 CHAPTER 3 REVIEW QUIZ (Answers are in the back of the text) 1) Insurers and insurance producers must to believe that the annuity recommendation is suitable based on information disclosed by the consumer. a) Earn a higher commission b) Have reasonable grounds c) Have a familiarity with the consumer d) Know the consumer s financial status 2) Part of the regulations for the suitability of deferred variable annuities has required additional scrutiny of any annuity replacement where the consumer has: a) Had an annuity replacement within the previous 36 months. b) Two or more in-force annuities. c) Not received a buyer s guide. d) Not disclosed 3) In order to substantiate the belief that a recommendation was appropriate, the producer needs: a) To have sold like products to like individuals within the previous 12 months. b) To have attended enough educational seminars to be familiar enough with the product being sold. c) A record of the information collected from the consumer that was used to formulate the recommendation. d) Approval from his/her immediate supervisor. 4) Without, the agent may be found liable for a claim. a) Developing a personal relationship with his client b) Proper presentation c) Proper illustration d) Accurate recordkeeping 5) Pursuant to Texas law, insurers must maintain records regarding the monitoring and must be able to produce and make the records available to the Department: a) Upon request. b) On a weekly basis. c) On a monthly basis. d) On an annual basis. 51

56 CHAPTER 4 REPLACEMENT OF LIFE INSURANCE AND ANNUITIES Texas Insurance Code Chapter 1114 addresses policy replacement. A replacement occurs when a new policy or contract is purchased and in connection with the sale, an existing policy is surrendered, forfeited, lapsed or otherwise terminated. If premium payments are discontinued, and it is converted to reduced paid-up insurance, continued as extended term insurance, or reissued with any reduction in cash value, it is a replacement. If you borrow, whether in a single loan or under a schedule of borrowing over a period of time for amounts in the aggregate exceeding twenty-five percent of the loan value set forth in the policy, it is considered a replacement. "Replacement" means a transaction under which a new policy or contract is to be purchased, and for which it is known or should be known to the proposing agent or proposing insurer that, by reason of the transaction, an existing policy or contract has been or is to be: Lapsed, forfeited, surrendered or partially surrendered, assigned to a replacing insurer, 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 so as to effect a reduction in benefits or in the term for which coverage would otherwise remain in force or for which benefits would be paid; Reissued with any reduction in cash value; or Used in a financed purchase. The purpose of Chapter 1114 as defined by Section is to: Regulate the activities of insurers and agents with respect to the replacement of existing life insurance and annuities; Protect the interest of purchasers of life insurance or annuities by establishing minimum standards of conduct to be observed in replacement or financed purchase transactions; 52

57 Ensure that purchasers receive information with which a decision in the purchaser s best interest may be made; Reduce the opportunity for misrepresentation and incomplete disclosure; and Establish penalties for failure to comply with the requirements adopted under the chapter. The penalties set forth for noncompliance are intended to reduce the likelihood of misrepresentation and anything short of full disclosure. The existing insurer and the new insurer must disclose sufficient information to the consumer to provide the consumer with the ability to understand the affect of the financed purchase. If a consumer is exchanging an existing annuity for a new annuity, a comparison between the contracts should be performed. This comparison and disclosure involves revealing relevant facts about both the current annuity and the proposed annuity the producer should contrast and compare each feature and benefit, item by item. SECTION DEFINITIONS For the purpose of this section, we present the following general definitions as defined by Sec (1) Agent means an individual who holds a license under Chapter 4054 and who sells, solicits, or negotiates life insurance or annuities in this state. (2) "Direct-response solicitation" means a solicitation made: (A) by a sponsoring or endorsing entity or individually; and (B) solely through mails, telephone, the Internet, or other mass communication media. (3) "Existing insurer" means the insurer, the policy or contract of which is or will be changed or affected by a replacement. (4) "Existing policy or contract" means an individual life insurance policy or annuity contract that is in force, including a policy under a binding or conditional receipt or a policy or contract that is within an unconditional refund period. (5) "Financed purchase" means the purchase of a new policy that involves the actual or intended use of funds to pay all or part of any premium due on the new policy obtained by: (A) the withdrawal or surrender of an existing policy; or (B) borrowing from values of an existing policy. 53

58 (6) "Illustration" means a presentation or depiction that includes nonguaranteed elements of a life insurance policy over a period of years. (7) "Registered contract" means a variable annuity contract or variable life insurance policy subject to the prospectus delivery requirements of the Securities Act of 1933 (15 U.S.C. Section 77a et seq.). (8) "Replacement" means a transaction under which a new policy or contract is to be purchased, and for which it is known or should be known to the proposing agent or proposing insurer that, by reason of the transaction, an existing policy or contract has been or is to be: (A) lapsed, forfeited, surrendered or partially surrendered, assigned to a replacing insurer, or otherwise terminated; (B) 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; (C) amended so as to effect a reduction in benefits or in the term for which coverage would otherwise remain in force or for which benefits would be paid; (D) reissued with any reduction in cash value; or (E) used in a financed purchase. (9) "Replacing insurer" means the insurer that issues or proposes to issue a new policy or contract that: (A) replaces an existing policy or contract; or (B) is a financed purchase. (10) "Sales material" means a sales illustration and any other written, printed, or electronically presented information: (A) created or completed or provided by the insurer or agent; and (B) used in the presentation to the policy or contract owner relating to the policy or contract purchased. POLICY SUMMARY A policy summary addresses the specific product being presented for sale in detail, outlining the following items: Premiums; Dividends; Benefit amounts; Cash surrender values; 54

59 Policy loan interest rates. Individual states have varying requirements regarding policy summaries when the policy summary should be delivered to the prospect and in conjunction with what other documents, etc. Sec addresses policy summary requirements in this state. Section Definition of Policy Summary (a) For purposes of this chapter, "policy summary" has the meaning assigned by this section. (b) For a policy or contract other than a universal life insurance policy, "policy summary" means a written statement regarding the policy or contract that at minimum contains, to the extent applicable, the following information: (1) the current death benefit; (2) the annual contract premium; (3) the current cash surrender value; (4) the current dividend; (5) the application of the current dividend; and (6) the amount of any outstanding loan. (c) For a universal life insurance policy, "policy summary" means a written statement that contains, at minimum, the following information: (1) the beginning and ending date of the current reporting period; (2) the policy value at the end of the previous reporting period and at the end of the current reporting period; (3) the total amounts that have been credited or debited to the policy value during the current reporting period, identifying each by type, including interest, mortality, expense, and riders; (4) the current death benefit at the end of the current reporting period on each life covered by the policy; (5) the net cash surrender value of the policy as of the end of the current reporting period; and (6) the amount of any outstanding loans as of the end of the current reporting period. FINANCED PURCHASE Generally, most financed purchases could accurately be called replacements. There are numerous strategies used by unscrupulous agents to circumvent 55

60 replacement regulations, such as not listing the existing policies as a source of funds for the purchase of the new contract and then surrendering the existing contract after the new contract is issued. Another strategy is to borrow funds from or take a partial surrender of the existing contract to initially fund the new contract (at application), and then surrender or liquidate the remainder of the existing contract and funnel the proceeds into the newly established contract. The goal of various state regulations is to detect the most common strategies used to circumvent traditional replacement laws for the consumer to have sufficient information disclosed to them by the existing insurer and the new insurer. Section Financed Purchase (a) If a withdrawal, surrender, or borrowing involving the policy values of an existing policy is used to pay premiums on a new policy that is owned by the same policyholder and is issued by the same insurer not earlier than four months before the effective date of the new policy or 13 months after the effective date of the new policy, it is deemed prima facie evidence of the policyholder's intent to finance the purchase of the new policy with existing policy values. (b) Subsection (a) applies only to regulatory review of an individual transaction. (c) The prima facie standard under Subsection (a) is not intended to increase or decrease the monitoring obligations contained in Section (g). NOTICE OF EXISTING POLICY OR CONTRACT With respect to replacement contracts and in addition to the policy summary, agents are required to provide prospects with a notice acknowledging the fact that the prospect has an existing policy or contract. Both the agent and the consumer must sign the notice. Sec outlines the duties of insurers and agents regarding the required notice. Section Duties of Agent; Notice (a) An agent who initiates an application for a life insurance policy or annuity contract shall submit to the insurer, with or as part of the application, a statement signed by both the applicant and the agent as to whether the applicant has existing policies or contracts. (b) If the applicant states that the applicant does not have existing policies or contracts, the agent's duties, after compliance with Subsection (a), with respect to replacement are complete. 56

61 (c) If the applicant states that the applicant does have existing policies or contracts, the agent shall present and read to the applicant, not later than at the time of taking the application, a notice regarding replacements as provided by Subsection (d). (d) Except as provided by Subsection (e), the notice required by this section must be given in a form adopted or approved by the commissioner. The notice shall be signed by both the applicant and the agent attesting that the notice has been read aloud by the agent or that the applicant did not wish the notice to be read aloud, in which case the agent is not required to read the notice aloud. The notice must be left with the applicant unless it is presented to the applicant by electronic means and signed electronically, in which case the insurer shall mail the applicant a copy of the notice not later than the third business day after the date the application is received by the insurer. The notice must list all life insurance policies or annuities proposed to be replaced, properly identified by the name of the insurer, the name of the insured or annuitant, and the policy or contract number if available, and include a statement as to whether each policy or contract will be replaced or whether a policy will be used as a source of financing for the new policy or contract. If a policy or contract number has not been issued by the existing insurer, alternative identification, such as an application or receipt number, must be listed. (e) Commissioner approval of a notice is not required if a notice adopted or approved by the commissioner is used and amendments to that notice are limited to the omission of references not applicable to the product being sold or replaced. (f) In connection with a replacement transaction, the agent shall leave with the applicant, at the time an application for a new policy or contract is completed, the original of all sales material or a copy of that material. Electronically presented sales material must be provided to the policy or contract owner in printed form not later than the date that the policy or contract is delivered. (g) Except as provided by Section (g), in connection with a replacement transaction, the agent shall submit to the insurer to which an application for a policy or contract is presented: (1) a copy of each document required by this section; (2) a statement identifying any preprinted or electronically presented insurerapproved sales materials used; and (3) copies of any individualized sales materials, including any illustrations related to the specific policy or contract purchased. Policy replacement should take place for one reason The insurer and agent must genuinely believe that the replacement is beneficial to the consumer and in the consumer s best interest. If that is the case, and the proposed replacement is set to go forth, there are certain procedures that must be followed. Any existing 57

62 insurer that may be affected by the proposed replacement must be notified within a certain designated timeframe. Sec sets forth these requirements. Section Duties of Replacing Insurers That Use Agents (a) If a transaction under this chapter involves a replacement, the replacing insurer shall comply with this section. (b) The replacing insurer shall verify that the required forms are received and are in compliance with this chapter. (c) The replacing insurer shall: (1) notify any existing insurer that may be affected by the proposed replacement not later than the fifth business day after: (A) the date of receipt of a completed application indicating replacement; or (B) the date that replacement is identified if it is not indicated on the application; and (2) mail a copy of the available illustration or policy summary for the proposed policy or available disclosure document for the proposed contract to the existing insurer not later than the fifth business day after the date of a request from the existing insurer. (d) The replacing insurer must be able to produce copies of the notification regarding replacement required by Section (d), indexed by agent, until the later of: (1) the fifth anniversary of the date of the notification; or (2) the date of the replacing insurer's next regular examination by the insurance regulatory authority of the insurer's state of domicile. (e) The replacing insurer shall provide to the policy or contract owner notice of the owner's right to return the policy or contract within 30 days of the delivery of the policy or contract and to receive an unconditional full refund of all premiums or considerations paid on the policy or contract, including any policy fees or charges or, in the case of a variable or market value adjustment policy or contract, a payment of the cash surrender value provided under the policy or contract plus the fees and other charges deducted from the gross premiums or considerations or imposed under the policy or contract. The notice may be combined with other notices required under this chapter in accordance with rules of the commissioner. (f) In transactions in which the replacing insurer and the existing insurer are the same or are subsidiaries or affiliates under common ownership or control, the replacing insurer shall allow credit for the period that has elapsed under the replaced policy's or contract's incontestability and suicide period up to the face amount of the existing policy or contract. With regard to financed purchases, the credit may be limited to the amount that the face amount of the existing 58

63 policy is reduced by the use of existing policy values to fund the new policy or contract. (g) If an insurer prohibits the use of sales material other than that approved by the insurer, as an alternative to the requirements under Section (g), the insurer shall: (1) require with each application a statement signed by the agent that: (A) represents that the agent used only insurer-approved sales material; and (B) states that copies of all sales material were left with the applicant in accordance with Section (f); (2) not later than the 10th day after the date of issuance of the policy or contract: (A) notify the applicant by sending a letter, or by verbal communication with the applicant by a person whose duties are separate from the marketing area of the insurer, that the agent has represented that copies of all sales material have been left with the applicant in accordance with Section (f); (B) provide the applicant with a toll-free telephone number to contact the insurer's personnel involved in the compliance function if copies of all sales material have not been left with the applicant in accordance with Section (f); and (C) stress the importance of retaining copies of the sales material for future reference; and (3) be able to produce a copy of the letter or other verification in the policy file until the fifth anniversary of the date of termination or expiration of the policy or contract. A registered contract is exempt from the requirements of Sections (c) and (c) with respect to the provision of illustrations or policy summaries, but must provide instead premium or contract contribution amounts and identification of the appropriate prospectus or offering circular. (Sec ) Certain duties are also imposed on the insurer whose contracts are being replaced. When an insurer receives a notice that one of their contracts is being replaced, they are responsible for: Sending the policy or contract owner an in force illustration or policy summary along with a notice about the owner s right to receive information about the existing policy and contract values; Providing the customer with a notice stating that the release of policy values may affect the guaranteed elements, non-guaranteed elements, face amount, or surrender value of the policy from which the values are released; and 59

64 Retaining replacement notifications received from the insurers issuing the replacement life insurance policies or annuities for a period of five years. Section (c) states: Duties of Existing Insurer If a transaction involves a replacement, the existing insurer shall comply with this section. (c) The existing insurer shall send a letter to the policy or contract owner regarding the owner s right to receive information regarding the existing policy or contract values. The letter must include, if available, an in force illustration or, if an in force illustration cannot be produced not later than the fifth business day after the date of receipt of a notice that an existing policy or contract is being replaced, a policy summary. The information must be provided not later than the fifth business day after the date of receipt of the request from the policy or contract owner. TITLE 28, PART 1, CHAPTER 3 SUBCHAPTER NN Subchapter NN is concerned with consumer notices. The purpose of this subchapter is to specify the content and procedural requirements for consumer notices for life insurance policy and annuity contract replacements as required by the Insurance Code , Consumer Notice Documents, which states: (a) The commissioner by rule shall adopt or approve model documents to be used for consumer notices under this chapter. (b) The department may develop model documents under this section, or the commissioner may approve model documents developed by insurers or published by national organizations recognized by the commissioner. There are specific forms that must be used in the case of policy replacement. Insurers may deviate from these forms; however, the commissioner s approval must be obtained prior to their usage. Section states that the agent who initiates an application for an annuity contract (or life insurance policy) must submit a signed statement that the applicant has existing policies or contracts. The statement must be signed by both the applicant and the agent and included as part of the application. The applicant must also be given a copy of the statement. Section Consumer Notice Regarding Replacement For Insurers Using Agents Section addresses consumer notices regarding replacement for insurers who use agents. 60

65 (a) An agent who initiates an application for a life insurance policy or annuity contract shall submit to the insurer, with or as part of the application, a statement signed by both the applicant and the agent as to whether the applicant has existing life insurance policies or annuity contracts. (b) If the applicant states that the applicant does have existing policies or contracts, the agent shall present and read to the applicant, not later than at the time of taking the application, a notice regarding replacement that contains the text contained in Figure: 28 TAC (b), or substantially similar notice filed with the department and approved under this subchapter. The notice shall be signed by both the applicant and the agent attesting that the notice has been read aloud by the agent or that the applicant did not wish the notice to be read aloud, in which case the agent is not required to read the notice aloud. If the applicant does have existing policies or contracts at the time, the agent must present the applicant with a notice regarding replacement. The notice must be presented and read aloud to the applicant at the time the application is taken. If the applicant does not wish the agent to read the notice aloud, the requirement to do so is waived. However, both the agent and the applicant still must sign the statement attesting to the fact that the applicant did not wish the notice to be read aloud. On page 2, the following statement reads: I do not want this notice read aloud to me. (Applicants must initial only if they do not want the notice read aloud.) Section also addresses these requirements through direct response solicitations. Duties of Insurers Regarding Direct Response Solicitations If an application is initiated through direct response solicitation, insurers are required to submit a statement that asks whether the applicant intends to replace, discontinue, or change an existing policy or contract through the application for the policy or contract that is being proposed to them at the time. The statement must be signed by the applicant and the agent and becomes part of the completed application package. (Sec ) a) In the case of an application initiated as a result of a direct response solicitation, the insurer shall require submission of a statement asking whether the applicant, by applying for the proposed policy or contract, intends to replace, discontinue, or change an existing policy or contract. The statement may be included with, or submitted as part of, each completed application for a policy or contract. If the applicant indicates a replacement or change is not intended or if the applicant fails to respond to the statement, the insurer shall send the applicant, with the policy or contract, a notice, in a form adopted or approved by the commissioner, regarding replacement. 61

66 The replacement notice must be on the following form, (b), or must contain similar text pre-approved by the commissioner. This form must be used whether a replacement is indicated or not. Form (b) 62

67 63