Suitability What Producers Need to Know

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SuitabilityWhat Producers Need to Know
Symetra Life Insurance Company Bellevue,
WA First Symetra National Life Insurance Company
of New York New York, NY
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Introduction

• Making a Suitable Sale
• Assures product meets clients goals
• Engenders trust between producer and client
• Builds professional reputation
• Increases sales and reduces surrenders
• Complies with state regulation
• Meets Symetras expectation that all sales be
  suitable

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Agenda

• Regulatory environment on suitability
• Know your client
• Know your product
• Suitability case studies

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Regulatory Environment

• Background
• Concern regarding annuity sales to seniors
  provoked the NAIC (National Association of
  Insurance Commissioners) to issue
• NAIC Senior Protection in Annuity Transaction
  Model Regulation 2003
• Broadened concern regarding annuity sales to
  entire consumer public and the NAIC issued
• NAIC Suitability in Annuity Transaction Model
  Regulation 2006

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Regulatory Environment

• Annuity Disclosure Model Regulation
• To provide standards for disclosing minimum
  information about annuity contracts to protect
  consumers and foster consumer education
• State activity
• Annuity disclosure regulation adopted by a number
  of states requires that each consumer receive
  information in the form of a buyers guide
  regarding the product.

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Regulatory Environment

• Duties of Insurance Producers
• In recommending to a consumer the purchase of an
  annuity the producer must have reasonable grounds
  for believing the recommendation is suitable
  based on facts disclosed by the consumer as to
• Investments and other insurance products
• Financial objectives and insurance needs

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Regulatory Environment

• Reasonable efforts must be made to obtain
  information on
• Financial status
• Tax status
• Investment objectives
• Other information deemed reasonable

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Regulatory Environment

• No obligation where consumer
• Refuses to provide information
• Enters into transaction not based on
  recommendation
• Fails to provide complete, accurate information

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Know Your Client

• The goal of suitability is to determine the
  clients current and future needs and goals and
  meet those needs with the most appropriate
  financial product.
• To do this, you must
• know your client and
• understand the product.

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Know Your Client - Exercise

• Need
• Protect family in event of death
• Provide level income for 5 years
• Leave legacy to niece
• Supplement pension

• Product
• Single premium immediate annuity
• Term insurance
• Variable annuity
• Permanent insurance

Match the need in column 1 with the product in
column 2
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Know Your Client - Answers

• Need
• Protect family in event of death
• Provide level income for 5 years
• Leave legacy to niece
• Supplement pension

• Product
• Single premium immediate annuity
• Term insurance
• Variable annuity
• Permanent insurance

The reality is that we are working with people
with multiple needs and goals, competing uses
for funds and very real biases and beliefs. With
all of these moving parts making a
suitable recommendation is a challenging task
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Know Your Client

• What you need to know about your client
• you must have comprehensive information on your
  client
• Why you need to know it
• you must understand how the information
  influences suitability

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Know Your Client - Personal Information

• Age
• How old is your client?
• What is your clients life expectancy?

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Know Your Client - Personal Information

• How does age affect suitability?
• If younger
• May be more risk tolerant
• Withdrawal prior to 59 ½ tax penalties
• If older
• May be less risk tolerant
• Long term investment may be inappropriate
• Note where surrender charges extend beyond life
  expectancy

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Know Your Client - Personal Information

• Family status
• Is the client married or single?
• Does your client have dependents?

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Know Your Client - Personal Information

• How does family situation affect suitability?
• Married or single
• Dependents including
• Spouse, children, grandchildren, elderly parents,
  other?
• Expected changes
• Change in marital status
• Move to another home or assisted living
• Health issues
• Other?

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Know Your Client - Personal Information

• Health issues
• Is the client in good health?
• Are dependents in good health?
• Is the client challenged with poor health?

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Know Your Client - Personal Information

• How does health affect suitability?
• Poor health
• Gives rise to medical cost, cash flow needs
• Limits options
• May be ineligible for
• Life insurance
• Long term care insurance
• Annuity inefficient
• Consider impaired risk SPIA
• Good Health
• Family history suggests longevity

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Know Your Client - Personal Information

• Experience
• Does the client have investment experience?

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Know Your Client - Personal Information

• How does investment experience affect
  suitability?
• Investment experience suggests
• Familiarity with financial concepts
• Understanding risk
• Ability to monitor performance

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Know Your Client - Personal Information

• Employment
• Is the client employed?
• Is the client self-employed?
• Is the client retired?

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Know Your Client - Personal Information

• How does employment affect suitability?
• Steady cash flow
• Availability of tax advantaged programs
• Defined benefit plan
• Defined contribution plan
• Pending job change may indicate
• Cash flow need
• Cash flow interruption

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Know Your Client - Financial Information

• Income and sources of income
• Salary or pension
• Business
• Start up
• Mature
• Investments
• Inheritance or trust fund
• Rental property
• Potential cash flow restraints

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Know Your Client - Financial Information

• How does income affect suitability?
• Ability to cover basic expenses
• Ability to sustain ongoing cost of product
• Ability to forego access to asset in product

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Know Your Client - Financial Information

• Source of premium / purchase payments
• Current cash flow
• Savings
• Loan
• Bank
• Mortgage
• Existing product via 1035

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Know Your Client - Financial Information

• How does source of premium affect suitability?
• Client paying from current cash flow
• Is contribution sustainable
• Client borrowing
• Must be examined for reasonableness
• Client moving from one product to other
• Must be examined for reasonableness

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Know Your Client - Financial Information

• Cash position / liquid assets
• What is the clients cash position?
• Does the client have cash reserves?

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Know Your Client - Financial Information

• How does cash position affect suitability?
• Emergency fund
• 3 months
• Liquidity needs
• Immediate needs (within 5 years)
• Future needs (over 5 years)
• Level of monthly expenses
• Mortgage
• Credit card debt
• Other?

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Know Your Client - Financial Information

• Net worth
• What is the clients net worth?
• Net worth total assets less total debt
  excluding primary residence and mortgage
• Does the transaction represent a large percentage
  of net worth?

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Know Your Client - Financial Information

• How does net worth affect suitability?
• Size of contract
• Guideline purchase payment should not exceed
  20 of the clients net worth
• explain how this is a suitable financial plan for
  your client's situation if it is greater than
  20,

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Know Your Client -Tax Information

• Tax bracket
• What is the clients tax bracket?
• Is the client subject to Alternative Minimum Tax
  (AMT) ?

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Know Your Client -Tax Information

• How does tax bracket affect suitability?
• Impacts the value of tax deferred instrument
• Suggests whether instrument is within income range

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Know Your Client- Insurance Information

• Has the client covered these risks ?
• Survivor needs
• Health insurance
• Disability coverage
• Long term care
• Property and casualty

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Know Your Client- Insurance Information

• How do these needs affect suitability?
• Basic risks must be covered
• Survivor needs
• Temporary Long term
• Health insurance
• Medicare eligibility
• Disability coverage
• Property and casualty insurance
• Long term care

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Know Your Client - Investment Information

• Current investments
• Short term investments
• Long term investments
• Risk tolerance
• Understanding risk
• Guarantees against loss of principal
• Time horizons

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Know Your Client- Investment Information

• How do these characteristics affect suitability?
• Current investments should match
• Investment horizons
• Risk tolerances
• Identify and correct mismatches

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Understand the Product

• Product benefits
• Death benefit
• Living benefits
• Extended care benefit
• Critical illness benefit
• Other ancillary benefits

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Understand the Product

• Product Interest Rates
• Guaranteed minimum interest rate
• Potential interest rates
• Additional interest
• Caps on interest rates

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Understand the Product

• Distributions
• Withdrawals
• Penalties and costs
• Surrender charges
• Loans
• Annuitization

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Understand the Product

• Product Costs
• Policy fees
• Premium taxes
• Distribution charges
• Mortality and expense charges
• Costs of insurance
• Sub account charges

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Understand the Product

• Proper structure
• Ownership
• Annuitant
• Beneficiary

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Understand the Product

• Product taxation
• Accumulation period
• not subject to current income taxation
• Income period
• received as an annuity
• exclusion ratio
• not received as an annuity
• last in first out

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Understand the Product

• Product taxation
• At death
• subject to taxation as Income in Respect to a
  Decedent

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Case Study 1

• Alice is 32 years old. Both she and her husband
  work at companies with 401(k) plans. They have 3
  children, high credit card debt and a mortgage.
• What more information do you need ?
• What products may be suitable for this client?

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Case Study 1- Discussion

• What are the financial and planning goals ?
• Income protection
• Is there sufficient life insurance on both
  parents?
• Education
• How old are the children?
• Do any of the children have special needs?
• Comfortable retirement
• Do both participate in employers 401 k?

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Case Study 1 - Discussion

• What products may be suitable?
• Family protection
• Life insurance
• Saving for college
• GET plan
• 529 plan
• Retirement
• IRA
• Annuity

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Case Study 2

• Bob is 60 and single. He owns a boat repair
  business that is successful but cyclical. He does
  not plan on selling his business but he hopes to
  semi-retire in 5-7 years.
• What more information do you need ?
• What products may be suitable for this client?

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Case Study 2 - Discussion

• What are his financial and planning goals?
• Income protection
• Does Bob have family obligations?
• Does he have health insurance?
• Has he covered the risk of disability?
• Business succession planning
• Is there a partner or key employee to take over?
• Retirement planning
• What savings has Bob done to date?

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Case Study 2 - Discussion

• What products may be suitable?
• Income protection
• Disability insurance
• Life insurance
• Long term care insurance
• Business succession planning
• Funded buy out agreement
• Retirement planning
• Qualified plan
• IRA
• Annuity

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Case Study 3

• Chuck and Dora are in their late 70s. They have a
  comfortable retirement, receiving a pension plan
  from a manufacturing company and the federal
  government. They own their own home and have
  little debt. They value the quality of life in
  the Puget Sound area. Dora is a day trader.
• What more information do you need ?
• What products may be suitable for this client?

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Case Study 3 - Discussion

• What are the financial and planning goals?
• Maintain comfortable retirement
• What is their net worth?
• How are their investments positioned? Too
  conservative, too aggressive?
• How is their health? Is there a plan in place for
  deterioration of health?
• Wealth transfer
• Is there family to receive their wealth?
• Charitable giving
• Is there a cause they would like to support?

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Case Study 3 - Discussion

• What products may be suitable?
• Maintain comfortable retirement
• Immediate annuity
• Wealth transfer
• Life insurance held in trust
• Charitable giving
• Life insurance

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Case Study 4

• Evelyn and Frank have been married two years.
  Evelyn is 47 and Frank is 62. Neither work.
  Frank is a retired executive of an import
  company. Entire net worth of the couple is 5.6
  million- invested in real estate and cash
  equivalents.
• What more information do you need ?
• What products may be suitable for this client?

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Case Study 4 - Discussion

• What are the financial and planning goals?
• Income Protection
• Are they adequately diversified?
• What is the risk tolerance of each?
• Do either have family obligations?
• Wealth transfer
• Is there family to receive their wealth?
• Charitable giving
• Is there a cause they would like to support?

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Case Study 4 - Discussion

• Income protection
• Deferred variable annuity
• Immediate annuity
• Life insurance
• Wealth transfer
• Life insurance held in trust
• Charitable plan
• Life insurance

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Case Study 5

• Gloria is 68 years old. She has just inherited
  80,000 dollars from her uncle. She is widowed and
  has one son with two children. She lives
  modestly on her husbands pension and Social
  Security.
• What more information do you need ?
• What products may be suitable for this client?

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Case Study 5 - Discussion

• What are her financial and planning goals?
• Retirement Income
• Is her income sufficient to cover month to month
  costs?
• Does she have any savings?
• Family obligations
• What role is she playing with her grandchildren?

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Case Study 5 - Discussion

• What products may be suitable ?
• Retirement income
• No product
• Immediate annuity may be suitable
• Family obligations
• Burial policy

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Thank You