Code of Ethics — DFS
The department, after consultation with the National Association of Insurance and Financial Advisors – Florida (NAIFA-Florida), adopted a code of ethics to govern the conduct of life agents in their relations with the public, other agents, and insurers.
The code of ethics applies standards of conduct designed to avoid the commission of acts or the existence of circumstances that constitute grounds for suspension, revocation, or refusal of license, and to avoid the use of unfair trade practices and unfair methods of competition which would be in violation of any provision of Unfair Insurance Trade Practices. [Source: §626.797]
Every licensee who has knowledge of unlicensed insurance activity is required to report such activity to the Department. In the case of unlicensed insurance activity by Multiple Employer Welfare Arrangements (MEWA), labor leasing organizations, and purportedly collectively bargained plans, the following information should be reported:
- Any known organizational information
- Information on any insurance or reinsurance contracts, benefits, or coverage offered
- The names, addresses, and phone numbers of any officers or agents
- The names, addresses, and phone numbers of any employers, employees, or individuals who may be enrolled by or receiving services from the entity reported
Military Sales Practices — United States Armed Forces
The standards of this chapter are intended to protect active duty service members from dishonest and predatory insurance sales practices by declaring certain identified practices to be false, misleading, deceptive, or unfair. It applies only to the solicitation or sale of life insurance or annuity products by an insurance producer to an active duty service member of the USAF. [Source: Chapter 69B-240.001]
The following acts by an insurance producer on a military installation with respect to in-person, face-to-face solicitations of life insurance are declared to be unfair or deceptive:
- Soliciting the purchase of life insurance “door-to-door” or without first establishing a specific appointment
- Soliciting service members in a group, mass, or captive audience where attendance is mandatory
- Making appointments with or soliciting service members during scheduled duty hours
- Soliciting service members in barracks, day rooms, unit areas, or transient personnel housing where the installation commander has prohibited solicitation
- Soliciting the sale of life insurance without first obtaining permission from the installation commander
- Posting bulletins, notices, or advertisements not authorized by the installation commander
- Failing to present DD Form 2885, Personal Commercial Solicitation Evaluation, to service members solicited
- Accepting an application for life insurance on the life of an enlisted member without first obtaining a completed copy of any required counseling confirmation form
- Using DoD personnel as a representative or agent in an official or business capacity with respect to the solicitation or sale of life insurance
- Participating or using another insurance producer to participate in any USAF sponsored education or orientation program
The following acts by an insurance producer constitute corrupt practices and are declared to be unfair or deceptive regardless of location:
- Submitting, processing, or assisting in the submission or processing of any allotment form used by the USAF to direct a service member’s pay to a third-party for the purchase of life insurance
- Receiving funds from a service member for premium payment from a depository institution with which the service member has no formal banking relationship
- Entering into an agreement where funds received from a service member by allotment are identified as “Savings” or “Checking” and where the service member has no formal banking relationship
- Using DoD personnel as a representative or agent in an official or unofficial capacity with respect to the solicitation or sale of life insurance to service members or their families
- Offering or giving anything of value to DoD personnel to procure their assistance in facilitating the solicitation or sale of life insurance to another service member
- Offering or giving anything of value to a service member for attending any event where an application for life insurance is solicited
- Advising a service member to change his or her income tax withholding or state of legal residence solely to increase disposable income to purchase life insurance
- Making any representation that has the tendency or capacity to confuse or mislead a service member into believing the insurer, producer, or product is affiliated with, endorsed by, or recommended by the U.S. Government or the USAF
Understanding Industry Products & Suitability of Sales and Services
The purpose of this section is to require insurers to set standards and procedures for consumer recommendations which result in transactions involving annuity products, and to establish a system for supervising such recommendations to ensure that the insurance needs and financial objectives of consumers are appropriately addressed at the time of the transaction. [Source: 627.4554(1)]
The following information must be collected from the consumer to determine suitability of any annuity recommendation:
- Age
- Annual income
- Financial situation and needs, including debts and other obligations
- Financial experience
- Insurance needs
- Financial objectives
- Intended use of the annuity
- Financial time horizon
- Existing assets or financial products, including investment, annuity, and insurance holdings
- Liquidity needs
- Liquid net worth
- Risk tolerance, including willingness to accept nonguaranteed elements in the annuity
- Financial resources used to fund the annuity
- Tax status
Age and time horizons are closely linked. Annuities are traditionally viewed as retirement vehicles. Fixed-rate annuities are very safe financial vehicles and remain a good choice for those nearing retirement. Variable annuities have a higher risk than fixed-rate annuity counterparts and generally are not recommended for those nearing or in retirement.
Annual income is often linked to the buyer’s retirement goals. Longevity risk is very real in retirement — it is the risk of living longer than the money lasts. When annual income is insufficient, the annuity’s goal might be to produce additional retirement income. An annuitized annuity may provide the additional annual income needed.
The financial resources used for funding the annuity must make sense. If the buyer wants to put an entire nest egg into an annuity leaving no cash reserves, it would not make sense to tie the money up in a nonliquid annuity. Retirees need to have a cash reserve for emergencies.
Agents must be concerned with the origins of money deposited into an annuity. Several types of insurance products, including annuities, are now used by those wishing to launder funds. Additionally, buyers should not place funds into an annuity if the funds will be needed in the near future — annuities are long-term vehicles and are not suitable for short-term requirements.
The buyer’s perception of annuities is often impacted by their financial experience. Agents must ask questions and determine the financial experience of the buyer as a means of determining how much information is necessary to cover. It is always better to over-educate the buyer than under-educate him or her.
Financial objectives always start with the math necessary to arrive at the answer. A man telling his agent “I want to retire next year” is not stating an objective; he is stating a goal without details of how that goal can be reached. Financial objectives require math — figures must be put on paper, looked at, studied, and viability established.
The time horizon is the length of time over which a person’s investments are acquired and held before they are liquidated for use in retirement or for some other goal. When goals cannot be reached by age 60, time horizons may need to be extended. Longevity estimates are also important — few people adequately plan for the number of years they will live in retirement.
Agents must be aware of their client’s assets to determine the suitability of placing an annuity. Since it is important that retirees have some liquid assets for emergency needs, placing all available funds into an annuity is not suitable and should not be done.
Liquidity risk is the risk that a given asset cannot be traded or sold quickly enough to produce the funds required immediately. Financial planners advise clients to keep an emergency fund to cover unexpected expenses. When agents are recommending annuity products, they must be aware of potential emergency needs. Tying up all a client’s cash in an annuity would be unsuitable in all cases.
Net worth refers to an individual’s wealth or lack thereof. Net worth is the value of the assets owned less the debts owed. Liquid net worth focuses only on assets that may be quickly converted to cash. When annuities are being considered it is important to have liquid assets available since annuities are not liquid vehicles.
Each investor has a “risk tolerance” — the ability to accept the risks of the investments they choose. A young investor has time to make up for losses; an older person does not. The riskiest annuity is the variable annuity where return is variable and not guaranteed. Professionals recommend fixed-rate annuities for retirees since risk is not desirable by the time retirement has arrived.
Many people entering retirement will not know what their retirement tax status will be. They will not know if their Social Security income will be taxed or how their total monthly income may be affected by taxation. As a result, retirees may have less net income than they anticipated. The IRS 10 percent early withdrawal penalty is likely to remain.
Chapter 69B-215, as reviewed in the DFS Code of Ethics, also applies to Regulatory Marketing and should be recognized accordingly. An investigation showing violations of 69B-215 may very well indicate multiple violations.
Before purchasing or exchanging an annuity by a senior, an insurance agent or insurer, unless exempt or required by FINRA to perform an alternative suitability analysis, must use Florida’s Annuity Suitability Questionnaire to obtain information in order to determine the suitability of a recommendation.
Before executing a replacement or exchange of an annuity by a senior, the insurance agent or insurer must also provide contract comparison information utilizing the Disclosure and Comparison of Annuity Contracts.