The 10/10 Rule: Ineffective and spreading like wildfire
November 28, 2011 by Sheryl J. Moore
By Sheryl J. Moore
AnnuitySpecs.com
Limiting surrender charges on
annuities because of bad agent behavior is like outlawing automobiles because
they are used in the process of drunken driving deaths.
More than a
quarter of the states in our nation have insurance commissioners that have
chosen to implement a rule which is fueled by false allegations against the
indexed annuity industry. The 10/10 Rule is legislation (on the books or desk drawer) that
limits annuity surrender charges to a maximum 10 years and a 10 percent penalty.
The rule applies to fixed, indexed and variable annuities. Each state’s
variation of the 10/10 Rule is different; some states add a component for the
annuitant’s age, others disallow market value adjustments, one state has even
added a provision concerning one’s wealth (or lack thereof). In the end, if you
live in one of the following states, your state insurance regulators have either
implemented or are considering this rule:
- Alaska
- Connecticut
- Delaware
- Florida,
- Illinois (repealed their 10/10 Rule)
- Minnesota
- New Jersey
- Oregon
- Pennsylvania
- South Carolina
- Texas
- Utah
- Washington
- Wisconsin
And if it wasn’t enough that a third of the states in
our nation are using a variation of this rule, it is also being utilized through
an alternative product filing method in 84 percent of states.
The
Interstate Insurance Product Regulation Commission (IIPRC), a growing sub-group
of the National Association of Insurance Commissioners, uses a 10/10 variation
as the template for their product filings. So, if an insurance company wants to
save time and money, and get their annuity product automatically approved by 42
different states (if approved by IIPRC), their products must adhere to a
specific variation of the 10/10 Rule.
Insurance regulators
The
10/10 Rule was implemented to help you protect annuity purchasers in your state,
particularly senior purchasers. In short, you have implemented the rule in order
to avoid seeing an 85-year-old great grandmother on a fixed income being
swindled into purchasing an annuity where she will not receive her full cash
value for 11 years or more.
In your efforts to prevent such situations,
you have also limited the product offerings to all of the residents of your
state. You may have considered big up-front premium bonuses as part of the problem, as they escalate
surrender charges on an annuity. (Ever realize that this is a sought-after
feature for millions of young savers?)
What has happened as a result of
your rule is that insurance companies have merely found more creative ways to
develop big bonus products, which are less transparent to the consumer. Instead
of seeing bonuses as high as 11 percent on indexed annuities, now we have
bonuses as high as 40 percent.
As you can see, this legislation did not
do what you intended. I would suggest that you focus on the market conduct
problem of agents suggesting unsuitable products and not make the annuity
product the spotlight. Insurance companies
The 10/10 Rule has challenged you to get annuities approved in about a
third of the United States over the past several years. Some of these states are
in your top five biggest grossing states for sales of annuities. In order to
remain competitive with other retirement income products, you’ve had to use your
imagination to get agents and annuity purchasers’ attention.
Products
with big up-front premium bonuses are more difficult to price today. Without the
aid of a vesting schedule/recapture charge on the bonus, the highest up-front
bonus you can fit into a 10-year product is 5 percent. It has become a challenge
to offer attractive rates for your clients as well; longer surrender charges
gave you the ability to offer higher caps, participation rates and lower
spreads.
Historically low interest rates throw an additional wrench in
the works. The commissions that your agents get paid on these products have
dropped as well; you just cannot pay out higher than 7 percent on a 10-year
annuity. As an unintended consequence, broker/dealers have adopted the 10/10
Rule for their “approved lists” of indexed annuity products.
So, the 55
percent of indexed annuity producers that have securities licenses must also be
limited to a 10/10-friendly product, even if they are not selling in a 10/10
state. Today, your most popular indexed annuity is nearly identical to a large
number of your competitors’ products. It is a constant struggle to develop a
unique product that your distribution can sell.
Insurance agents
Then 10/10 Rule affects the products you have available to sell to your
clients. Not only will you lose products with relatively high transparent
premium bonuses, but you will see a reduction in the annuity purchaser’s
potential indexed gains (lower participation rates, caps and higher spreads).
Ultimately, the rule means lower commissions for you, as well. Have you
noticed lately that many indexed annuities are using vesting schedules or
recapture charges on their bonuses? These penalize the client if they surrender
more than their 10 percent penalty-free amount.
This is just a friendly
way for the insurance company and annuity purchaser to share in the risk of
offering a bonus product. However, you’ll also notice that it takes a little
more explanation to properly convey a vesting schedule to a senior client.
What about those new, higher bonuses
which reach well into the double digits? You had better check to make certain
that the bonus is credited to the client’s account value — it may only be
available in the event of lifetime income payments being activated under a
guaranteed lifetime withdrawal benefit (this process is similar to
annuitization).
What you’ll likely see in your agent toolbox now is a
slew of 10-year products with a first-year surrender penalty of 10 percent, a 6
percent premium bonus, a vesting schedule and a 7 percent commission. Insurance
companies have maxed out the pricing on these 10/10-friendly products, resulting
in a cookie-cutter product design; effectively commoditizing a once-varied
industry.
Limiting surrender charges on annuities because of bad agent behavior is
like outlawing automobiles because they are used in the process of drunken
driving deaths. When used properly, indexed annuities of all durations are a
valuable insurance product, which save Americans’ retirement dollars from the
risk of loss due to market volatility.
I ought to know — I purchased an
indexed annuity with the highest premium bonus I could find. After all, I don’t
need income now, my money is qualified and I’ll be penalized by the government
if I withdraw any monies before I turn age 59-and-a-half. If you ask me, I would
have welcomed the opportunity to purchase a 20-year surrender charge annuity
(even though such a product doesn’t exist today).
What can you do about
this un-consumer-friendly rule? Write a letter to your state insurance division
to let them know that you want options when it comes to annuities.
These are
the only retirement income products that can provide safety and guarantees to
purchasers, along with a tax deferral feature, all the while promising income
they cannot outlive. If you don’t take action, you soon may not have a choice in
the matter; the world may be full of cookie-cutter annuities.