Introduction
Had Jane Austen lived in the 21st century, her Mrs. Dashwood might have added: “and very complicated, too.” As most financial advisors can attest, annuities have evolved into very complex financial instruments. That complexity has stirred up a debate. On one hand are those who can list 10 good reasons why everyone should invest in annuities, while an equal number of advisors have lists of reasons why no one should invest in annuities, ever. As with most debates, the truth can be found somewhere between the two extremes.
At one time, an annuity was a simple concept — it was simply a series of payments. The word “annuity” comes from the Latin word for year, annum. Initially, an annuity was a fixed annual payment paid to the recipient for the remainder of his or her lifetime. It was simply a type of pension (and what concerned Mrs. Dashwood was that once her husband agreed to pay his half-sisters an annuity, he would be “on the hook” to make annual payments for the rest of their lives — a very serious business, indeed).
Today most annuities pay monthly income, and the word “annuity” has come to describe any stream of payments for a guaranteed period of time. The payout period may be fixed, such as ten years, or the annuity period can be measured in terms of the recipient’s life. The concept of an income stream that lasts a lifetime is, for many, a very comforting thought. There are, however, financial advisors who twist this reassuring concept into a fear-driven sales pitch: “What if you outlive your income?” Such sales practices, coupled with the complexity of today’s annuities, have prompted regulators to enact new suitability rules for advisors who recommend the purchase of annuities to their clients.
In Chapter 1 we will explore updates to Florida’s new suitability requirements. In Chapter 2 we’ll review some of the more complicated features of annuity contracts that may affect whether an annuity is suitable for a particular client. Chapter 3 discusses potential annuity investors, their investment objectives and other factors that may affect their decision to purchase an annuity. Chapter 4 addresses the regulatory framework in which the annuity industry operates, and specific laws and rules Florida agents should be aware of.
Before we start, please review the following two press releases issued by the Florida Department of Financial Services. As you can see, the suitability of annuity recommendations (or lack of suitability in these cases) can have major financial and personal consequences for annuity purchasers — and the Department has taken its responsibility to protect the annuity buying public very seriously.
2024 Update — Best Interest Standard Now in Effect
Florida significantly strengthened its annuity suitability rules effective January 1, 2024, through amendments to Section 627.4554, Florida Statutes (HB 1185/CS/CS/SB 166). These changes align Florida with the NAIC’s Best Interest model regulation and represent the most significant upgrade to the state’s consumer protection framework since the Seibel Act of 2008.
Under the new Best Interest standard, an agent must:
- Act in the best interest of the consumer under the circumstances known at the time of the recommendation — without placing the financial interest of the agent or insurer ahead of the consumer’s interest.
- Satisfy four distinct obligations: Care, Disclosure, Conflict of Interest, and Documentation.
- Have a reasonable basis to believe the recommended annuity addresses the consumer’s financial situation, needs, and objectives based on the consumer’s suitability profile.
- Disclose any material conflicts of interest — including compensation arrangements — that could influence the recommendation.
Broker-dealers and registered representatives must also comply with applicable SEC and FINRA rules, including Regulation Best Interest (17 C.F.R. §240.15l–1), for variable annuity recommendations.
New standardized disclosure forms DFS-H1-1990, DFS-H1-1991, and DFS-H1-1992 were adopted effective May 22, 2024, under Rule 69B-162.011, F.A.C. The original replacement comparison form DFS-H1-1981 remains required for annuity replacements and exchanges.
Source: Florida DFS Compliance Corner, January 2024 — myfloridacfo.com
Florida DFS Press Release — November 14, 2008
CFO Sink, AARP Team Up to Find Greater Protections for Senior Investors in Florida
Solutions discussed during second meeting of Sink’s Safeguard Our Seniors (SOS) Task Force
With seniors age 65 and older expected to soon represent 30 percent of Florida’s population coupled with an upward trend in complaints to her office about financial products such as annuities, Florida Chief Financial Officer Alex Sink challenged members of the Safeguard Our Seniors (SOS) Task Force to consider meaningful financial protections for senior investors. The task force was created to help better protect Florida seniors against financial fraud, with an immediate focus on annuity fraud.
“The number of complaints from Florida seniors about annuities has nearly quadrupled in the last three years,” said Sink, whose department has opened 474 investigations on financial fraud involving seniors, with 70 percent of cases related to annuity and life insurance transactions. “Better financial protections for our growing population of senior residents and tougher consequences for those who defraud our seniors demand our immediate attention.”
Teaming up with CFO Sink was AARP Florida representative Bentley Lipscomb, former secretary of the Florida Department of Elder Affairs.
“Over the last several decades, Florida has spent a lot of money and energy encouraging seniors to retire to ‘paradise’ here in Florida. With the current market conditions, we have an even greater responsibility to protect them from financial fraud as they look for ways to invest their hard-earned savings during retirement,” said Lipscomb, who shared information about AARP’s “No Free Lunch” program, which recruits senior citizens to attend and report on high-pressure sales tactics at free lunch and dinner seminars.
Task force members also heard from Anne Ridings, a guardian with Lutheran Services, who recounted her experience with Joseph Seale, a former resident of Ft. Myers. In 2006, following the sale of Seale’s home, a life insurance agent sold three annuities with a 15-year surrender period to Seale, 85 years old at the time, that tied up all of his liquid assets. Months later, Seale was hospitalized and Ridings was appointed his guardian by the courts. The department was able to recover more than $256,000 for Seale, representing the original investment without penalty, which helped Seale remain in the nursing home with proper care. The agent, who made over $13,000 in commissions selling inappropriate annuities to Seale, had his license revoked by the Department.
Task force members also heard from Scott Stolz, President of Planning Corporation of America, a division of Raymond James Financial, that some indexed annuities sold within the marketplace have surrender periods as long as 20 years with surrender charges as high as 20 percent — contracts that could not possibly be deemed suitable for seniors in their late 70s and early 80s.
According to Sink, solutions that emerged as consistent themes for better protecting senior investors included:
- Tougher criminal penalties for those convicted of annuity fraud
- Stricter monitoring of sales agents by insurance companies
- More aggressive education of industry, law enforcement, state attorneys, judges and the public
- Greater oversight of and higher standards for obtaining certifications or designations to sell annuities
- Creating an independent alternative dispute resolution process to resolve disputes involving agents’ sale of inappropriate products to seniors
The SOS Task Force was scheduled to meet again in early January to consider solutions to better protect seniors against annuity fraud, and also to deliberate ways to safeguard seniors against problems associated with Stranger-Owned Life Insurance (STOLIs) products and reverse mortgages.
Florida DFS Press Release — October 28, 2008
CFO Sink Helps South Florida Senior Recover $217,000 From an Inappropriate Annuity Transaction
Florida Chief Financial Officer Alex Sink’s investigators recently helped Kikuko West, a Vero Beach senior, recover more than $217,000 in potential losses after she allegedly was tricked into prematurely replacing an existing annuity by an area insurance agent. Kikuko, 75, contacted the Department of Financial Services (DFS) after hearing about CFO Sink’s newly created “Safeguard Our Seniors” (SOS) Task Force, which is examining ways the state can reduce financial fraud against Florida seniors.
CFO Sink’s office has also helped recover more than $300,000 for an 81-year-old woman from New Port Richey as well as nearly $325,000 for an 82-year-old living in Daytona who were both scammed into purchasing inappropriate annuity investments.
“Every year, my department investigates hundreds of bad actors who prey upon Florida seniors, like Kikuko, luring them into inappropriate investments,” said CFO Sink. “We created the ‘Safeguard Our Seniors’ Task Force to identify how our state can better protect seniors from financial threats, starting with annuity fraud.”
According to Kikuko, the agent attempted to replace her and her husband’s existing annuity policy with a new one. The agent had committed in writing not to finalize the transaction or transfer any funds until Kikuko and her husband returned from a trip up north. Despite the written commitment, the agent proceeded with the transfer of funds.
After reviewing paperwork left behind by the agent, CFO Sink’s investigators determined that the agent appeared to have violated Florida law, which requires that buyers have a 15-day free look period without penalty once the contract is received. At the time of the funds transfer, Kikuko had not yet been presented with a contract. DFS investigated the agent’s actions in this case.
Senior Floridians who believe they may have been the victim of annuity fraud should call 1-877-My-FL-CFO or visit www.MyFloridaCFO.com to file a complaint.