north american company for life & health insurance 8032Z Rev. 04/03 annuity compliance review April 2003 The contents of this booklet are very important. Please read this entire document carefully and sign the acknowledgement on the last page. Please return the signed form to the North American Company Annuity Service Center, 4601 Westown Parkway, Suite 300, West Des Moines, Iowa, 50266. You may also fax the completed form to (866] 322-5933. PLEASE NOTE: This information is current as of April 2003. This information can and will change periodically as new products are introduced, procedures modified, and the annuity environment goes through changes. You are responsible for keeping abreast of this information. www.nacolah.com
TABLE OF CONTENTS: Insurance Marketplace Standards Association (IMSA).................................Page 3 Wills, Trusts & Medicaid Planning...............................................Page 3 Advertising Guidelines........................................................Page 3 North American Company Indexed Annuity Guidelines.................................Page 5 Complaint Handling..........................................................Page 6 General Suitability Concerns....................................................Page 6 Special Needs of the Senior Market..............................................Page 6 Summary & Certification......................................................Page 8 INTRODUCTION It has become increasingly important to introduce some type of regular training to ensure that North American Company agents understand the following: The products they are selling Compliance/legal issues surrounding annuity sales The challenges that come with selling to seniors Advertising guidelines Company procedures about approval of agent generated sales literature Please carefully read the following sections. Contact the Annuity Service Center Marketing Team at 866-322-7066 for any questions. 2
WHAT IS IMSA? The Insurance Marketplace Standards Association is an organization of individual life insurance and annuity companies. Membership is voluntary. IMSA promotes high ethical standards in the sale and service of each company s insurance products. Each company must renew their membership every three years by participating in rigorous self and independent assessments. WHAT DOES OUR MEMBERSHIP IN IMSA MEAN? North American Company endorses and supports the concepts in the Principles and Code of Ethical Market Conduct established by IMSA. As a member of IMSA since 1998, our company has adopted and is committed to the following Principles of Ethical Market Conduct: To conduct business according to standards of honesty and fairness; To provide service to the customers which, in the same circumstance, you would apply or demand for yourself; To provide competent and customer-focused sales, based on an analysis of the insurable needs and financial objectives of the customer; To engage in active and fair competition; To provide advertising and sales materials that are clear as to purpose and honest and fair as to content; To provide fair and expeditious handling of consumer complaints and disputes; To comply with all applicable laws, regulations, and company requirements; To report any activities of which you are aware that may be in violation of this code. WILLS, TRUSTS & MEDICAID PLANNING North American has noted publicity regarding the use of Living Trusts as a financial planning tool. We have also become aware of litigation generated against marketers of living trusts, insurance companies and agents where the living trust concept was marketed on a mass basis in connection with the sale of financial products such as annuities. While we believe that, in the appropriate circumstances, a living trust can be a valuable planning device for some clients, mass distribution of this concept in connection with the sale of annuities is not appropriate. This section is not intended to be legal or tax advice by North American Company to you or your clients. North American Company s policy is that you should strongly encourage your clients to consult their tax advisor or legal expert before establishing a living trust or purchasing any financial product in connection with utilizing a living trust. Please be aware that annuities offered by North American Company are not specifically designed for use in "Medicaid- Friendly" annuity programs. Please consult a tax advisor or legal expert for more information. AD GUIDELINES The Compliance Department and the Annuity Service Center are pleased to announce enhanced, streamlined procedures for submitting your advertising to our Compliance Department for review and approval. Start taking advantage of this ease of doing business by emailing your ad to compliance@nacolah.com or fax it to our dedicated fax machine number: 312-648-7780. These new methods will expedite the review and approval process and have you selling more.faster! For easy reference, our advertising checklist is attached to assist you in complying with state regulations and maintaining high market conduct standards. Please read on to see what you can do to expedite the review and approval process! 3
For additional questions, please contact Terri Silvius at 800-800-3656 ext. 27858 or Tracy Michels at ext. 87648. ADVERTISING CHECKLIST NORTH AMERICAN COMPANY FOR LIFE AND HEALTH INSURANCE Advertisements must have prior written approval by the Company. Advertising would include any material, written or electronic, that is designed for distribution to the general public, including but not limited to: Print, radio, TV and any form of media advertising (newspaper, magazine, TV, radio, etc.). Product brochures, circulars, pamphlets and published articles. Sales presentations, prepared sales talks, seminar texts, telemarketing scripts and materials. Newsletters, research reports and performance reports or summaries. Prospecting, target market and form letters. Business cards and letterhead. Agent recruiting material. Sales illustrations. Third party software. Internet and internet websites or home pages and any form of e-commerce. If you are uncertain whether or not something falls within the definition of "advertising" please contact the Compliance Department for guidance. Without exception, all consumer advertising mentioning North American Company or referencing any of our products or services must be approved by Compliance prior to use. This includes products referenced by name, description, rate, or features. To ensure your materials are reviewed expeditiously, the following procedures should be taken into consideration. We suggest you review these guidelines prior to submitting any advertising piece for approval. When an ad is submitted for approval, Compliance will notify you of the form number assigned to the ad. This form number is to be printed in the lower left corner of the ad. Advertisements may need to be filed with state insurance departments, which will add to the approval turnaround time. You will be notified if this is the case. Due to the changing nature of regulations governing advertisements and sales materials, compliance approval is valid for up to 12 months. This time period may be shorter if interest rates are referenced in the ad. Upon expiration, you must re-submit the ad for approval if you intend to continue using the ad. If revisions to your ad are required, you must submit a final copy of the ad with the revisions to Compliance for final approval and filing, if necessary. Include your agency s name as it appears on your agent s license. For example, if an agent is licensed as "John Doe" but is doing business as "City Insurance Agency," "John Doe" must appear on the ad. Always indicate the licensed agent as the contact person. All consumer ads must have the name of the agent, agency (if applicable), address and phone number. If the advertisement will be distributed in the state of California, you are also required to include your state license number (agent number) on the advertising. The product being advertised must clearly be identified as a life insurance policy or an annuity contract. The terms "no cost," "disappearing" or "vanishing" may not be used in any advertising materials. In addition, a life policy cannot be billed as an "investment or "retirement" vehicle. Do not refer to premium payments as "deposits". If you are comparing our products to a Certificate of Deposit (CD), the following disclosure must be included on the ad: Insurance products and annuities are not deposits of or guaranteed by any bank and are not insured by the Federal Deposit Insurance Corporation (FDIC) or any other agency of the United States. They may involve investment risk, including possible loss of value." Indicate all product names registered with a service mark or registered trademark as applicable. Any ad promoting one of our products must describe the policy type, form number, and issuing company. A typical disclosure is as follows: Marketing Name sm is issued on Form XXXX (group certificate) or XXXX (individual contract) or state variations, by North American Company for Life and Health Insurance, Chicago, IL. This product, its features and its riders may not be available in all states. If an ad is intended for agent use only, be sure to indicate "For Agent/Broker Use Only. Not Intended For Consumer Solicitation Purposes" on the advertisement. If a reference is made to any withdrawal feature of a product, include the disclosure "Withdrawals prior to age 59 1/2 may be subject to IRS penalties." 4
If reference is made to specific interest rates, include the statement "Interest based on current rates and subject to change without notice." Reference to any commercial rating A.M. Best, for example must incorporate the full description of the rating: i.e. "Rated "A" (Excellent) for financial excellent overall performance when compared to the norms of the life/health insurance industry." Also include a statement about the number of categories that a rating service would use to rank a company and where a particular ranking would fall within the total number of categories: i.e. "An "A" (Excellent) rating by A.M. Best Company is the 3rd highest rating out of 15 categories." If you decide to include rating information on your website be sure to provide full disclosure, or simply link to our web site for this information. Any use of statistics or reference to any information from an outside source must clearly identify the source of the information including the name and date of the report or publication. INTERNET ADVERTISING GUIDELINES Internet advertising includes home pages and all related pages in an agency/agent website. To submit your site and/or page for approval, complete and submit an Advertising Submission Form along with copies of all relevant web pages including all links, and instructions for accessing the site online. Note that approval must be received prior to any Web site "going live." Regulations that apply to print advertising also apply to Internet advertising. Since a Web site is accessible to all consumers, regardless of where they live, Internet advertising must comply with advertising requirements of all states. Many web sites, including those that market insurance products, may be identified by a marketing name that is different from the name shown on the "official" license for the agency or agent. Please note that a marketing name can easily be construed as a DBA (doing business as) and as such could require that the name be filed with the respective secretary of state office(s) and/or state insurance department(s). Since information contained on a Web site can be viewed by virtually anyone, anywhere in the world, include where you are licensed to do business, and that you are a domestic U.S. agent/agency. For example: "John Smith, DBA XYZ Life Insurance Agency, Inc., a domestic U.S. insurance agency licensed to do business in (states)," or "licensed to do business in all states except (states)." When including product information that is for agent use only, please provide the Internet address, User ID and password. Our Company has an extensive portfolio of products, and now it s even easier to promote them. If you have any questions regarding our advertising guidelines, please send Compliance an email. You may also call your MGA or Marketing Sales Support Representative at 866-322-7066. NORTH AMERICAN COMPANY INDEXED ANNUITY GUIDELINES North American Company offers innovative annuity products for you and your clients. With numerous companies offering a wide array of Indexed Annuity product designs, it is important to understand all the features and options available. The following section explains the features of North American s Indexed Annuity portfolio. While this section tries to explain the main features, all North American Company Indexed Annuity products are different, therefore, please refer to our product-specific brochures, Annuity Disclosure Statements and website (www.nacolah.com). Because the company is continually introducing new products, it regularly publishes and distributes to its agents product-specific material describing the features of its Indexed Annuities. As an agent for the company you are responsible for reviewing and understanding this material and the products you sell on our behalf before offering them to customers. By signing this Compliance Review, you represent that you have and will review the product-specific material published and distributed to you by the Company and that you will not offer products for sale to customers before you have reviewed the product-specific material and have a complete understanding of the product. 5
FIXED ACCOUNT The Fixed Account will earn the current Fixed Account interest rate. This rate will be guaranteed for the entire year, and a new rate will be declared thereafter. The minimum Fixed Account interest rate is no less than 1.5% on all products. Please utilize the current Interest Rate sheet (6745Z) for current rate information. INDEX ACCOUNT North American Company offers interest credits based on the performance of various market indices. Each year the resulting interest credit is credited to the Index Account. A Cap may also be applied to this index credit on certain products. Participation Rate: The Participation Rate is an index growth percentage applied to the contract at the end of the Index Period. The Participation Rate is guaranteed for the first year and declared annually thereafter on all products except the Simple Seven SM. The Simple Seven SM guarantees the Participation Rate for seven years. The Participation Rate is applied after the Index Cap. The minimum Participation Rate per product are as follows: Market Choice III Plus SM...........................30% Market Choice II SM.................................30% Simple Seven SM....................................30% North American Heritage Max SM...................20% North American Heritage Bonus SM................20% Cap: The Cap is the maximum percentage of indexed credit that can be earned for that year. The Cap is set at the beginning of each contract year and is guaranteed for one year. Minimum Cap percentages per product and crediting methods are as follows: Market Choice III Plus SM...........................10% Annual Point-to Point Market Choice II SM.................................10% Annual Point-to Point Simple Seven SM....................................5% Annual Point-to Point; 7% Daily Averaging North American Heritage Max SM...................10% Annual Point-to Point North American Heritage Bonus SM................10% Annual Point-to Point If the index growth is zero or negative after applying the Cap and Participation Rate, the amount credited in that year to the Indexed Value will be zero. TRANSFER OPTIONS The client may transfer the values between the Fixed Account and the Index Account on each anniversary. By current Company practice, transfers are allowed up to 30 days following the contract anniversary. Based on current tax laws, these transfers between options will not be taxable or subject to surrender penalties. 6
MINIMUM GUARANTEED CASH VALUE (MGCV) The Cash Surrender Value cannot be less than the Minimum Guaranteed Cash Value (MGCV). The MGCV is a percentage of premium received, less withdrawals, compounded at the guaranteed interest rate of no less than 1.5%. The applicable MGCV percentages per product are as follows: Market Choice III Plus SM................70% of first-year premium plus 90% of renewal premiums, less withdrawals, accumulated at 3% interest Market Choice II SM......................80% of first-year premium plus 90% of renewal premiums, less withdrawals, accumulated at 3% interest Simple Seven SM.........................80% of first-year premium plus 90% of renewal premiums, less withdrawals, accumulated at 3% interest North American Heritage Max SM........100% of first-year premium (excluding bonus), less withdrawals, accumulated at 2% interest for the first 27 years and 3% thereafter, less surrender charges North American Heritage Bonus SM......100% of first-year premium (excluding bonus), less withdrawals, accumulated at 1.5% interest for the first 19 years and 3% thereafter, less surrender charges WITHDRAWALS Once per year, after the first anniversary, the client may withdraw, without any surrender charge or Interest Adjustment, up to 10% of the current Accumulation Value. Any excess amount will be subject to a surrender charge. The 10% withdrawal amount is non-cumulative between contract years. Certain withdrawals prior to age 59 1 2 may be subject to an IRS penalty. SURRENDER CHARGES A surrender charge will be deducted from the Accumulation Value as a result of a Full Surrender or Withdrawal in excess of the 10% penaltyfree amount described above. Surrender charges on IRS required minimum distributions that exceed the 10% penalty-free amount are waived by current Company practice. Potential earnings may be reduced if the client surrenders before the end of the surrender period. Market Choice III Plus SM................15 Years (22%, 22%, 22%, 22%, 22%, 20%, 18%, 16%, 14%, 12%, 10%, 8%, 6%, 4%, 2%, 0%) Market Choice II SM......................10 Years (10%, 10%, 10%, 10%, 10%, 10%, 8%, 6%, 4%, 2%, 0%) Simple Seven SM.........................7 Years (12%, 12%, 12%, 10%, 8%, 6%, 4%, 0%) North American Heritage Max SM.........14 Years (22%, 22%, 22%, 22%, 20%, 18%, 16%, 14%, 12%, 10%, 8%, 6%, 4%, 2%, 0%) North American Heritage Bonus SM......15 Years (20%, 19%, 18%, 17%, 16%, 14%, 12%, 10%, 8%, 6%, 5%, 4%, 3%, 2%, 1%, 0%) INTEREST ADJUSTMENT North American Company s Indexed Annuity products include an Interest Adjustment, which allows the company to credit higher rates than on products without an Interest Adjustment. It is applied only during the surrender period to full surrenders and any partial surrender in excess of the penalty-free amount. This adjustment will increase or decrease the surrendered amount based on the change in the interest rates during the period since the client purchased their Index Annuity. Please refer to the Interest Adjustment explanation flyer (6890Z) for more information. DEATH BENEFIT At the death of the Owner or Annuitant, North American Company will pay the Accumulation Value to the beneficiary. In the case of Joint Annuitants, the death benefit will be paid at the second death. For Joint Owners, the death benefit will be paid upon the first death. Please note that interest earned from non-qualified annuities are taxable to the beneficiary at distribution. All amounts from qualified annuities are taxable at distribution. 7
PLEASE NOTE North American Company s Indexed Annuity products are not investments in the stock market and do not participate in any stock, bond or equity investments. In addition, market indices do not include the payment or reinvestment of dividends in the calculation of their performance. COMPLAINT HANDLING Please refer all complaints to North American Company s Compliance Department immediately upon receipt. Each complaint is often a timesensitive matter and the quicker we can help you respond; generally the better the resolution for all parties involved. A complaint can come from numerous sources including, but not limited, to contractowners, family members, and the State Insurance Department. GENERAL SUITABILITY CONCERNS No one product is appropriate for every client, this is why North American Company s Annuity Service Center offers a wide variety of annuity products. When determining the appropriate product there are many considerations that you must take into account, including: What type of liquidity is the client looking for? How long do they plan on keeping the policy? What is the client s risk tolerance? Does this product fit into the clients overall objectives? What other products has the client purchased? Not all of these questions can be answered with 100% accuracy, which is why it is important to keep all documentation pertaining to the sales and servicing of your clients. SPECIAL NEEDS OF THE SENIOR MARKET The senior market can be a good market for the annuity producer. With a record number of baby boomers beginning to retire, there is a need for conservative retirement products such as fixed annuities. This market will continue to grow with the ageing of our population. With more sales opportunities, there are also some things to consider when dealing with the senior market. Although this is not a comprehensive list of senior market guidelines, it does illustrate some points to consider when dealing with this market. FULL FACT FINDING AND DOCUMENTATION IS VERY IMPORTANT: Documentation is the key to proper compliance in any market, but it is especially important in senior market sales. Suitability is extremely important and is often scrutinized in this market. NEED TO ERROR ON SIDE OF BEING CONSERVATIVE: rely on less aggressive strategies and recommendations. Seniors are conservative by nature. Whenever you have a doubt, it s always best to "BUYERS REMORSE": Many people, including seniors, go through this phenomenon after making a major financial decision. Again, proper 8
documentation, a conservative strategy, and making sure the client fully understands what they have purchased will help overcome this issue. SOME CLIENTS MAY BE LESS SOPHISTICATED THAN THEY APPEAR: Seniors may give the impression of being "market-savvy" because they might have owned several stocks/bonds or mutual funds in the past, but realistically have little or no market knowledge. Agents must not assume that seniors understand annuity concepts without proper instruction. SENIORS OFTEN WORK CLOSELY WITH OTHER ADVISORS: Most seniors have other advisors. Examples of these advisors may include a CPA, a tax advisor, an attorney or even family members. These advisors may have different opinions and/or motives for the senior client. BROAD PROTECTION OF ELDER ABUSE LAWS: Elder abuse legislation has gained momentum in recent years. With the emerging senior population, often courts will favor on the conservative side with the senior client. BENEFICIARIES SOMETIMES HAVE DIFFERENT OBJECTIVES THAN CONTRACTHOLDER: A senior client s beneficiary may have a different financial objectives and opinions than the senior did at time of sale. Again, documentation is the key to keeping a record of the client s objectives and intentions at the time of the annuity purchase. These are just a few points to consider when dealing with the senior market. Please consult your elder law attorney for questions or clarifications. FOR AGENT USE ONLY. NOT INTENDED FOR CONSUMER SOLICITATION PURPOSES. Market Choice III Plus sm - LC115 & LS115A; Market Choice II sm LC118 & LS118A; Simple Seven sm LC126A & LS126A; North American Heritage Bonus sm LC136A & LS136A; North American Heritage Max sm LC135A & LS135A and all state variations are issued by North American Company for Life and Health Insurance, Chicago, IL. These products and their features may not be available in every state. Please contact the Marketing Department at 866-322-7066 for details on state availability. 9
summary & certification THE FOLLOWING STATEMENTS SUMMARIZE KEY POINTS OF THE NORTH AMERICAN COMPANY COMPLIANCE REVIEW. IT IS ESSENTIAL THAT AGENTS OF NORTH AMERICAN COMPANY FULLY UNDERSTAND THESE KEY POINTS. PLEASE READ EACH STATEMENT BEFORE PROCEEDING TO THE NEXT SECTION. Advertisements must have prior written approval by North American Company. Advertising includes any material, written or electronic, that is designed for distribution to the general public. Annuities offered by North American are not designed for use in "Medicaid-Friendly" annuity programs. There are many important factors to consider when working with the senior market. Proper documentation is essential. Always error on the side of conservatism when dealing within this market. I will not offer products for sale to customers before I have reviewed the product-specific material and have a complete understanding of the product. No one product is appropriate for every client, this is why North American Company s Annuity Division offers a wide variety of annuity products. Please sign below and return to North American Company. Please retain a copy for your records. By signing this acknowledgement, you certify that you have read this summary and understand the language and descriptions contained herein. You also acknowledge that you support and will adhere to ethical business and advertising standards and practices, as outlined in this booklet. Please fax this signed page to North American Company at (866) 322-5933 or mail to the address listed on the front cover. Agent Name and Agent Number Agent Signature and Date Agency Name Social Security Number 308032 April 2003 10