Suitability rules when recommending an income rider

by Leo Almazora10 Sep 2018

When selecting a fixed-index annuity with a lifetime income benefit rider for a client, most advisors have several go-to quality carriers to choose from. But to make sure they’re making a defensibly suitable recommendation, it’s best to analyze different options based on one specific criterion.

“[T]he annuity LIBR with the highest bonus or highest rollup rate, doubler or other bells and whistles gives the appearance of being the most suitable,” wrote Jim Pedigo, a retirement planning advisor with Financial Rate Watcher$, in a piece for InsuranceNewsNet Magazine. “[But] does the FIA LIBR provide the best payout for your client when they want to start receiving income?”

Pedigo said advisors ought to consider only guaranteed income payout rates in determining whether an annuity product is suitable. As an example, he described an advisor who, since the 1990s, has frequently turned to one of his favourite quality carriers when recommending fixed-equity index annuities with LIBRs.

“He just received a complaint from the Department of Insurance, which came from the attorney representing the children of one of Dan’s retired clients,” he said. The children had concerns about the guaranteed income their parents are set to receive, and wanted to know the basis on which the carrier was selected. And because the annuity with LIBR that was recommended didn’t seem to be the most suitable one for their conservative parent’s future income requirements, the children also wanted a full refund of their parent’s annuity premium deposit, with interest.

According to Pedigo, the advisor might not be too worried about having to provide a premium refund since the fiduciary rule and “best interest” standard proposed by the US Department of Labor for retirement accounts is no longer applicable. Because of that, the advisor might believe a proposal he gave his clients from one of his choice insurance companies would be an acceptable basis for his recommendation.

But even absent the “Best Interest” standard, advisors in the US are still subject to the provisions of the tentative annuity transactions model law from the National Association of Insurance Commissioners. “In brief, the law opts for a sales standard of ‘Suitability Plus,’” Pedigo explained. Aside from “reasonable competence, trustworthiness, fair dealing, diligence, care and skill by the producer,” any recommendation must not place “the financial or other interests of the producer ahead of the consumer’s interests” based on the consumer’s suitability information. The “Suitability Plus” standard also requires producers to make a record of recommendations and bases for recommendations at the time when they recommend or sell an annuity product.

To stay on-side, the advisor could have used detailed guaranteed payout software that could mine the universe of most fixed-index annuities and list dollar amounts of their LIBR minimum guaranteed lifetime income payouts, with cumulative amounts after 10 years and at age 95. Calculations are based on each client’s profile and needs, including the time they want income to be turned on.

“Granted, the ranking may not include one of [the advisor’s] favorite carriers, or pay the best commission, but it does provide a detailed list of fair recommendations for his clients,” Pedigo said.


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