The State of the States

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NAFA spends many hours each day working with state regulators and those influencing public policy to promote a healthy sales environment that protects consumers. NAFA also strives to keep fixed annuity oversight on a playing field level with other financial products; and annuity salespeople, with financial services salespeople, who sell products and services outside the fixed annuity industry.

Recently, we have seen a burgeoning of state activities, both regulatory and litigious, on suitability, Buyer’s Guide, the Interstate Compact, and sales practices and advertising. State regulators, legislators and the financial news media continue to promote their own agendas, and we have seen some increasingly concerning trends at the state level in recent months. Below is a brief summary of what we are watching and working on. NAFA members can find up-to-date information and changes or additions at


Currently 34 jurisdictions (33 states, plus the District of Columbia) have adopted the amended regulation. NAFA’s Legal Counsel Pam Heinrich spends a great deal of time working with the state departments to ensure consistency in both compliance dates and with the interpretation of individual state suitability language.


When they adopted the NAIC Suitability in Annuity Transactions Model Regulation, both California and Minnesota included language exceeding the Model’s requirements in regard to replacement sales to senior consumers, stating that “neither a producer nor an insurer shall in any event recommend to a person 65 years of age or older the sale of an annuity to replace an existing annuity that requires the insured to pay a surrender charge for the annuity that is being replaced, where purchase of the annuity does not confer a substantial benefit over the life of the policy to the consumer, so that a reasonable person would believe the purchase is unnecessary.” Both states require the finding of a reasonable basis to believe that the consumer would receive a “tangible net benefit” from the transaction, which again exceeds the Model’s language requiring the belief that the consumer would benefit from certain features of the annuity.

Because of product innovation, there is a natural migration to newer products with added features and benefits. Additionally, when consumers buy annuities, they purchase them to satisfy a financial objective or retirement goal. It is understandable that as financial objectives and goals change with lifestyle transformations and life events, it is often necessary and to consumers’ benefit to address those changes with different products.

However, there are laws that prohibit the practice of “churning” and “twisting,” and these laws are strongly enforced by state insurance departments. Moreover, NAFA carrier and marketing company members monitor agents and agent sales practices to safeguard customers.

Also, the majority of states and virtually all national carriers require insurers and insurance producers to have reasonable grounds to believe that any recommendation to replace or exchange an annuity is suitable, based on the consumer’s financial situation and needs, and also require that the consumer has been informed about the surrender period and any potential surrender charges, potential tax penalties, advisory fees and any other limitations on returns or market risk.

Finally, all states require that consumers who purchase annuities are provided notice that they have the right to return the policies or contracts within a certain time period after the delivery of the contracts (usually two weeks to 30 days) and receive full refunds of all premiums or considerations paid on them including any policy fees or contract charges, such as surrender charges. This “free look” feature is unique to insurance products and does not exist with other financial products or investments.


Arizona became the 44th jurisdiction (43 other states and Puerto Rico) to join the Interstate Insurance Produce Regulation Compact (IIPRC). Arizona HB 2482, the Compact legislation, will become effective on July 23, 2014. (Also, please note that the New York legislature has before it a current bill, NY SB 2895, to join the IIPRC.)


To date, 10 states have adopted, or have proposed to adopt, the 2013 updated NAIC Annuity Buyer’s Guide: Colorado, Georgia, Idaho, Iowa, Maine, New Jersey, Ohio, Oklahoma, Rhode Island and Utah. In addition, several of those states have concurrently adopted (or are in the process of adopting) the 2011 NAIC Annuity Disclosure Model Regulation, including Colorado, Ohio, and Rhode Island. NAFA members are finding it challenging to work with the new copyright restrictions placed on the Guide’s distribution, and NAFA is working with the NAIC to resolve this issue to ensure that our members and their customers have easy access to this valuable information.


On May 22, 2014, the Kansas Department issued Bulletin 2014-1 (found here), relating to Life Insurance and Annuity Advertising by Independent Marketing Organizations (IMOs). The purpose of the bulletin was to remind life insurers that they have a responsibility to ensure that marketing activities of third-party entities (IMOs and FMOs) are in compliance with K.A.R. 40-9-118, Kansas’s advertising and marketing regulation, which is based on the NAIC Life Insurance and Annuities Model Regulation. The Kansas Department expects insurers to take appropriate action to ensure that all advertisements produced and distributed by an affiliated IMO/FMO, including agent recruitment materials and training efforts, comply with K.A.R. 40-9-118. Such action could include regular communication with IMOs and FMOs and active monitoring.


Former California insurance agent Alan S. Lewis has been charged in Riverside County, California with 29 felony counts and one misdemeanor count, including embezzlement, grand theft and burglary, related to the sale of replacement annuities to 12 senior consumers, which resulted in those consumers incurring surrender charges. The Riverside County Assistant District Attorney prosecuting the case against Lewis argued in the preliminary hearing that the surrender penalties constituted embezzlement and theft—and because some of the transactions took place in the homes of consumers identified in the charging document, Lewis also committed burglary in making these sales. Mr. Lewis’ trial is scheduled to begin on June 9, 2014.

NAFA’s interest in the Lewis case is first and foremost to ensure that the fixed annuity marketplace remains competitive and robust, while supporting state regulatory practices to protect consumers, especially those in retirement or about to retire.

NAFA is very concerned when a court or state prosecutor attempts to criminalize the sale of any annuity that has a surrender charge, and it is especially troubling where the State equates the normal practice of in-home sales with common burglary or theft under false pretenses. A determination by the court here that selling an annuity with a surrender charge is tantamount to embezzlement or common theft—and if the sale occurs at the client’s home, with burglary—would have a chilling effect on the ability of consumers to have access to fixed annuities, which are, after all, insurance products designed to protect consumers against financial loss and to ensure an income stream for life. These insurance products and their features and benefits are reviewed by the California Department of Insurance before they are approved for sale in the state.

As we are continually learning, 151A was not the war to end all wars, to borrow a famous quote, it was a battle—and the war rages on with more battles big and small. We must maintain our vigil and aggressively continue our educational efforts with those within our industry to ensure that consumers are sold suitable annuities through compliant marketing and sales practices. We must also continue our efforts to inform, or correct those outside our industry about the role of fixed annuities, their ability to meet financial planning objectives and their value to all Americans, but particularly middle- to low-income individuals.

NAFA’s members are the essential element that powers the association and its activities. If you are not a member, please consider adding your voice and expertise to further our message and our mission.

Kim O’Brien is NAFA President & CEO. NAFA membership represents over 85% of all premium for fixed indexed, declared rate and income annuities written through the independent distribution system. Kim has over 30 years of experience in the insurance industry beginning as in 1981 as office manager for an insurance agency. In 2002 Kim developed and ran her own marketing organization and received the 2002 Entrepreneur Award from Sun Life. In between, Kim worked as a marketing executive for major insurance companies and was responsible for their annuity and term life insurance product line development, marketing, and training processes. In 1993, Kim served as interim deputy director of the Wisconsin Department of Insurance under Governor Tommy Thomson and served Governor Thompson until a permanent replacement could be found. In July 1992, Kim was the first women in Wisconsin to pass the CFP exam established in 1991 by the CFP Board as a single comprehensive examination modeled after the licensing examinations given to attorneys or Certified Public Accountants (CPAs). Kim O'Brien received her BA from Ripon College, her MFA from the University of Northern Colorado, and an MBA with an emphasis in Economics from Edgewood College, Madison, Wisconsin. In 2008, Kim was accepted into the Juris Doctorate program at the William H. Taft Law School and completed her first year and passed the preliminary California Bar as required before continuing her degree. She has recently re-instituted her studies to begin this summer after a hiatus due to her NAFA workload. As an avid musical theater fan and dancer, Kim has directed or choreographed over 60 shows in Milwaukee and Madison, Wisconsin. She lives with her husband and college sweetheart of 39 years, Kelly, in Phoenix nestled in the Thunderbird Conservatory she enjoys hiking the mountains with their Irish setters.

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