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  • 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    • Illinois (repealed their 10/10 Rule)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.

    Originally Posted at ProducersWeb on November 28, 2011 by Sheryl J. Moore.

    Categories: Sheryl's Articles
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