Here is a timely follow-up to the blog post I wrote a few weeks ago about annuities and elders. The Colorado Division of Insurance recently amended its regulations applicable to advertising and sales promotion of insurance and annuities, effective July 1, 2014. Regulation 4-1-1 apply to Variable Annuity Contracts and Amended Regulation 4-1-2, to Advertising and Sales Promotion of Life Insurance. This new regulation also applies to annuity contracts. You can read the new regulations here.
Section 6 of the new regulations is entitled Disclosure Requirement:
(B) An advertisement shall not omit material information or use words, phrases, statements, references or illustrations if the omission or use has the capacity, tendency or effect of misleading or deceiving purchasers or prospective purchasers as to the nature or extent of any policy benefit payable, loss covered, premium payable, or state or federal tax consequences. The fact that the policy offered is made available to a prospective insured for inspection prior to consummation of the sale, or an offer is made to refund the premium if the purchaser is not satisfied or that the policy or contract includes a “free look” period that satisfies or exceeds regulatory requirements, does not remedy misleading statements.
Section 6 (N) states:
No insurance producer may use terms such as “financial planner,” “investment adviser,” “financial consultant,” or “financial counseling” in such a way as to imply that he or she is generally engaged in an advisory business in which compensation is unrelated to sales unless that actually is the case.
What do these changes mean? Section 6(N) makes an important distinction concerning annuity sales persons and financial advisors to reflect that a person who sells annuities is typically not a financial adviser who receives compensation which is unrelated to the sales of annuities. So let’s take a look at the words that can no longer be used in Colorado to sell or advertise annuities and life insurance, due to the potential for misleading consumers?
Certificate of Deposit or CD
If you want to read more about this, check out this article in MarketWatch.
Why is this so relevant for elders? Many elders are afraid of running out of money toward the end of their lives and do not want to be a financial burden on their family members. The trickiest part about retirement planning is not knowing whether you will outlive your money. Another problem with annuities is that they tie money up for a prescribed period of time, when many elders need flexibility in their financial portfolio. One of the most infamous examples of inappropriate annuity sale for an elder is the story of Alice Bouchard, an 85 year-old who was sold a deferred annuity by an insurance agent which made her money unavailable until she was 101! Read more about it here.
There are FINRA guidelines and regulatory notices about “suitability” of particular annuities for elders and there are state law statutes and regulations (like the ones above) governing suitability also. Suitability includes the particular situation of the consumer, their age and needs for liquidity along with things like: what the consumer’s other investments are; the overall financial status; investment objectives and risk tolerance; the consumer’s tax situation; health status; availability of emergency funds and other factors. These are especially important in annuity sales to elders as over the years there were have been many documented sales that were inappropriate or detrimental to the elder. Colorado’s regulation 4-1-11 follows the suitability model regulation that was adopted by the National Association of Insurance Commissioners in 2010.
Annuities can be complicated and the contracts often contain many unfamiliar terms. Colorado’s new regulations help clarify how annuities can be sold to consumers. It is important to carefully consider a financial course of action, especially when someone is faced with advancing age and health crises. It is difficult enough to make a sound decision amidst fear, even when it is a fear that another (a stranger perhaps) has brought to you – made you aware of and thus creating an emotional need to resolve that fear. Yeats aptly observed in “Sailing to Byzantium” that this is no country for old men – this world full of youth and life, and that the agony of aging is inevitable. But I would submit that Fear – especially of being a burden on others – is another matter.
An important last detail I will consider is the “free look” period. A “free look” period is like a grace period to cancel the contract due to buyer’s remorse. This is for a limited period of time only and after the free look period has passed the contract is fixed and any withdrawals of funds outside the time frame prescribed in the annuity contract will incur sometimes very large penalties.
While the new Colorado regulations will help identify the “no no” words and further regulate techniques and tactics that cannot be used in the sales and marketing of annuities, it is still the best for the consumer to have time to carefully consider what they are getting into before an annuity is purchased.
©Barbara Cashman 2014 www.DenverElderLaw.org