Framing Your Case: The Art Of Suitability

Framing Your Case: The Art Of Suitability Image

by Sarah Mlynek, Advanced Marketing, Directory of Compliance for Creative Marketing

Just the other day, I was working on my computer with some photos I had recently taken. My 12-year-old son happened to wander by and see what I was doing. He stopped and insisted that he show me a few tricks he had learned about manipulating digital images. With just a few mouse clicks, he reframed the picture on the screen and blew up the facial features of the photo’s subjects making them appear as though they had gained dozens of pounds. Laughing, he left and meandered into the next room. It left me thinking about how much a picture can change simply by emphasizing certain aspects and changing the context that surrounds it. Suitability is much the same. How a case is framed and presented to a carrier can be the difference between whether an annuity gets issued or, on the other hand, is rejected as an unsuitable recommendation. For the indexed annuity industry, a focus on suitability represents a very recent change with far-reaching consequences. As you’ve probably heard, with the addition of the Harkin amendment to the Dodd-Frank Financial Reform Bill, the indexed annuity industry scored a major victory. Indexed annuities were officially defined as fixed insurance products. That victory, however, has brought other consequences, one of them being more uniform and strictly enforced suitability standards. Under the Harkin Amendment, in order for an indexed annuity to be considered a fixed insurance product, it must pass three separate tests. Simply stated, the annuity’s value cannot vary by reference to a separate account, it must meet standard non-forfeiture laws, and it must be issued in a state that has adopted the NAIC 2010 Suitability Model or be issued by a company that has adopted the standards of the model regulation. As a result, suitability will be the primary focus for insurers when issuing indexed annuities. For most agents, this represents a major shift in the way business is conducted. First, an agent must gather the information required by the model regulation. This includes the client’s age, annual income, financial situation and needs. Furthermore, the financial resources used for the funding of the annuity must be identified in addition to financial experience, financial objectives, intended use of the annuity, financial time horizon, existing assets including investment and life insurance holdings, liquidity needs, liquid net worth, risk tolerance, and tax status. Secondly, the producer will have to show “reasonable grounds” for making a recommendation to purchase an indexed annuity. The model states, “The insurance producer shall have reasonable grounds for believing that the recommendation is suitable for the consumer…” For replacement situations, this includes comparing and contrasting the benefits of the old product to the one being recommended. This is where properly identifying the reasons for the recommendation and bringing them to the forefront can make or break your case. In general, the key determinants of whether a recommendation is suitable are the age of the applicant, liquid assets, the percentage of net worth the annuity represents and the applicant’s financial goals. If these factors are all well within the standards that carriers apply, the case will usually proceed to issue quickly. However, if these factors approach the limits of what carriers consider suitable, or if the recommendation is a replacement, then properly framing your case becomes critical. This is where a well-written letter of explanation or cover letter can prove invaluable. A letter of explanation allows you to frame your client’s case in the best possible light. You can emphasize the reasons the client wants to proceed with the application and detail how the recommendation fits the client’s specific needs. It also provides the opportunity to include information that may not be found of the suitability form. For example, is the client replacing an annuity to add an income rider with plans to exercise the rider at a specified time in the future? Perhaps the features and benefits of your recommendation will allow the client to pass the annuity to the next generation and attain a financial objective. Maybe the client will receive an additional source of income or an inheritance in the near future that should be included in the suitability analysis. Again, the letter of explanation allows you to emphasize how the recommendation fits the client’s particular situation. One note of caution should be mentioned. When carriers examine the suitability of a recommendation, they not only look at the details, but they want to see that the big picture makes sense as well. Any inconsistencies within the suitability form or between the form and your letter of explanation can raise a red flag. For example, did you mention that the client planned to pass the annuity onto beneficiaries, but you also included an income rider? Maybe you checked the box on the suitability form that indicates the client has a high tolerance for risk, yet you’re putting the majority of assets in a low-risk product. These types of contradictions serve as a warning to carriers that the agent may not have done his due diligence when determining suitability and filling out the appropriate paperwork. Given the importance of consistency, make sure the details are right and the big picture makes sense. In the end, knowing how to frame your case to ensure quick issue can be a true art form. If you need help getting your difficult cases placed quickly, don’t hesitate to call your Annuity Sales Consultant. Help in creating a nice picture is just a phone call away.

Related Articles

Documentation & Doughnuts Navigating murky waters



Securities and Advisory Services offered through Client One Securities, LLC Member FINRA/SIPC and an Investment Advisor

Join the conversation