Regulation of Annuities Flashcards
General Provisions of Annuities [GEM-DRIF]
Grace Period
After the owner has paid the initial premium, he or she has a grace period of ___ days within which to pay every subsequent premium.
Incontestability
After a contract has been in force for ____ years, it becomes incontestable with respect to the truthfulness of any statements that the contract owner made in the application (other than those relating to _____, ______, or _______ ).
Entire Contract
The annuity contract constitutes the entire contract between the parties.
Misstatement of Age or Sex
If the age or sex of the annuity owner has been misstated and the premium was based on this misstatement, the benefits will be ________ to reflect what the premium would have purchased for the correct age or sex.
Participating Contracts
Divisible surplus must be apportioned _________ .
Reinstatement
If the contract owner defaults on a premium payment and lets the contract lapse, the owner may reinstate the contract within ___ years of the date on which it lapsed if he or she
submits an ___________;
provides evidence of ___________ ; and
pays all overdue payments and indebtedness, plus interest (not to exceed ___ percent).
Free-Look Period
The annuity owner is entitled to review the annuity for at least ___ days after it is delivered. If the annuity contract is sold by mail, the free-look period is ___ days.
Grace Period
After the owner has paid the initial premium, he or she has a grace period of 31 days within which to pay every subsequent premium. The contract remains in force during the grace period. If the annuity owner dies during the grace period, the insurer may deduct the amount of the premium that is due from any amount that it pays under the contract.
Incontestability
After a contract has been in force for two years, it becomes incontestable with respect to the truthfulness of any statements that the contract owner made in the application (other than those relating to age, sex, or identity).
Entire Contract
The annuity contract constitutes the entire contract between the parties. If the insurer intends to make the application a part of the contract, a copy of the application must be endorsed or attached to the contract when issued. All agreements between the insurer and the contract owner are contained within these documents.
Misstatement of Age or Sex
If the age or sex of the annuity owner has been misstated and the premium was based on this misstatement, the benefits will be adjusted to reflect what the premium would have purchased for the correct age or sex.
Participating Contracts
Divisible surplus must be apportioned annually. Dividends must be payable in cash or applied to a stipulated payment to the company under the contract.
Reinstatement
If the contract owner defaults on a premium payment and lets the contract lapse, the owner may reinstate the contract within three years of the date on which it lapsed if he or she submits an application; provides evidence of insurability; and pays all overdue payments and indebtedness, plus interest (not to exceed 6 percent).
Free-Look Period
The annuity owner is entitled to review the annuity for at least 10 days after it is delivered. If unsatisfied with it for any reason, the annuity owner can return it to the insurer for a full refund of the premium paid. If the annuity contract is sold by mail, the free-look period is 30 days.
What are Nonforfeiture Benefits?
For annuity contracts that have existed for at least ___ years, a nonforfeiture benefit provides that if the annuity owner surrenders the contract or allows it to lapse, the insurer will grant a _____________ on a plan stipulated in the contract.
The insurer may pay a _____ ____ _______ instead of a paid-up annuity benefit.
For annuity contracts that have existed for at least three years, a nonforfeiture benefit provides that if the annuity owner surrenders the contract or allows it to lapse after a specified period, the insurer will grant a paid-up annuity on a plan stipulated in the contract.
The insurer may pay a cash surrender benefit instead of a paid-up annuity benefit.
- (GMIB) riders
- (GMAB) riders
- (GMWB) riders
Many insurers are designing their variable annuity products to provide for some measure of ________ , either as ______________ or as _____________ ____________.
Most variable annuities offer the option for one or more of these guarantees through the purchase of:
- guaranteed minimum income benefit (GMIB) riders (annuitized payments),
- guaranteed minimum accumulation benefit (GMAB) riders (lump sum),
- or guaranteed minimum withdrawal benefit (GMWB) riders specify a ______________\_ of the contract’s invested premiums that can be withdrawn annually until ____ ____________ are recovered in full.
With each rider, the contract owner is ___________ that his or her premium can be recovered—by ___________, ____________, or through periodic ___________—regardless of
- the contract’s ___________ _______ and
- regardless of the __________ ___________ of the contract’s investment subaccounts.
Many insurers are designing their variable annuity products to provide for some measure of guarantee, either as accumulated values or as annuitized payments.
Most variable annuities offer the option for one or more of these guarantees through the purchase of:
- guaranteed minimum income benefit (GMIB) riders,
- guaranteed minimum accumulation benefit (GMAB) riders,
- or guaranteed minimum withdrawal benefit (GMWB) riders specifies a certain percentage of the contract’s invested premiums that can be withdrawn annually until net premiums are recovered in full.
With each rider, the contract owner is guaranteed that his or her premium can be recovered—by annuitization, in a lump sum, or through periodic withdrawals—regardless of
- the contract’s accumulated value and
- regardless of the actual performance of the contract’s investment subaccounts.
A guaranteed minimum withdrawal benefit (GMWB) rider promises that a contract owner can withdraw a limited amount each year until net premiums are recovered in full. It specifies a certain percentage of the contract’s invested premiums that can be withdrawn annually.
For example, a GMWB rider might provide for annual withdrawals of up to 6 percent of the contract’s invested premiums. In this case, a $50,000 premium investment would provide for annual withdrawals of up to $3,000, and the withdrawal period would be a little more than 16 years. The rider guarantees the annual withdrawal amounts. Even if the values in the variable annuity were to decline to $0, the owner of a GMWB would still be able to take his or her specified amounts every year for the duration of the guaranteed withdrawal period.
Under most GMWB riders, withdrawals can begin after the first contract year. To qualify for the guarantee, the contract owner is usually required to maintain a specified asset allocation among the variable annuity’s subaccount investment options.
How does a producer or insurer assess Annuity Suitability?
A producer or insurer is to make a recommendation on the basis of information disclosed by the consumer with respect to
- age,
- annual income,
- financial situation and needs,
- financial experience,
- financial objectives,
- purpose of the annuity,
- financial time horizon,
- existing assets (such as investments and life insurance holdings),
- liquidity needs,
- liquid net worth,
When recommending that a consumer buy or replace an annuity contract, a producer or insurer is required to follow certain standards to determine whether the purchase or replacement is advisable for the consumer, and whether the recommended annuity product is suitable for the consumer’s needs and objectives.
A producer or insurer is to make a recommendation on the basis of information disclosed by the consumer with respect to
- age,
- annual income,
- financial situation and needs,
- financial experience,
- financial objectives,
- purpose of the annuity,
- financial time horizon,
- existing assets (such as investments and life insurance holdings),
- liquidity needs,
- liquid net worth,
- risk tolerance, and
- tax status.
Before recommending the purchase or replacement of an annuity, the producer or insurer must make a reasonable effort to obtain this information from the consumer.
When making a recommendation on the basis of the consumer’s information, the producer or insurer must have a reasonable basis for believing that the recommendation is suitable for the consumer. This belief should be based on the reasonable belief that
- The consumer would benefit from the annuity contract;
- The particular annuity contract is suitable for the particular consumer; and
- In the case of a replacement, that the replacement is for consumer’s best interests.
To determine whether replacement is in the consumer’s best interests, the producer or insurer must consider
- Whether the consumer will incur any surrender charges, increased or additional fees, new surrender period, loss of existing benefits, and the tax implications;
- whether the consumer would benefit from annuity contract enhancements and improvements; and
- whether the consumer replaced another annuity contract within the last 36 months.
A producer or insurer has no obligation to the consumeer with respect to these suitability standards if
- A recommendation is not made
- A recommendation was made but turns out to have been based on materially inaccurate information provided by the consumer;
- A consumer refuses to provide relevant suitability information to the producer or insurer and no purchase or replacement is recommended; or
- A consumer ignores the recommendation of the producer or insurer in deciding to buy or replace an annuity product.
A producer or insurer that fails to follow these standards for determining suitability commits an unfair method of competition or unfair trade practice.
Key Points
- Annuities must contain a grace period, a free-look period, and incontestability, misstatement of age, and entire contract provisions.
- For annuity contracts that have existed for at least three years, a nonforfeiture benefit provides that if the annuity owner surrenders the contract or allows it to lapse after a specified period, the insurer will grant a paid-up annuity on a plan stipulated in the contract.
- The insurer may pay a cash surrender benefit instead of a paid-up annuity benefit.
- A guaranteed minimum withdrawal benefit (GMWB) rider promises that an annuity owner can withdraw a limited amount each year until net premiums are recovered in full.
- When recommending that a consumer buy or replace an annuity contract, a producer or insurer must follow certain standards to determine whether the purchase or replacement is advisable for the consumer. Failure to do so is an unfair method of competition or an unfair trade practice.
