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Maine.gov > PFR Home > Insurance Regulation > Producer Services > Equity indexed annuities

 

Equity indexed annuities

Equity indexed annuities have grown in popularity in recent years. Some of their characteristics have proven to be very attractive to risk-averse consumers. However, these products are complex financial instruments, and many purchasers do not understand what they are buying. Unfortunately, there are also some producers who fail to adequately understand what they are selling. This brief article touches on three major areas of concern which the Bureau has identified based upon recent cases: suitability, inadequate disclosure of terms in the sales presentation, and undue pressure during the free look period. Producers may be subject to discipline for making unsuitable recommendations or engaging in the other activities described below.

  • Suitability - Equity indexed annuities are illiquid and generally have significant surrender charges for extended periods. They are not the perfect “one size fits all” financial products that some have made them out to be. The suitability determination also must take into account whether the client will suffer a surrender charge due to replacing an existing product. Under the Insurance Code and Bureau Regulations, producers must have reasonable grounds for believing that recommendations are suitable, and must make complete and accurate comparisons when recommending a replacement.
  • Inadequate disclosures to consumers – One of the most common types of complaints to the Bureau comes from consumers who did not understand what they bought. Even with disclosure documents, consumers rely on the producer’s statements to make sense of these complex products. Sales of equity indexed annuities are particularly susceptible to misrepresentations and material omissions, which can be particularly damaging given their illiquidity and the surrender charges that often apply for an extended period of time. The appealing aspects of limited downside risk make it all the more important for producers to be certain that clients understand the entire picture, not just what they want to hear.
  • Undue pressure during the free look period – There will always be some purchasers who will choose to exercise their free look rights. This right is of course not limited to unsuitable transactions. If the client wishes to exercise his or her right to examine and cancel the transaction during the free look period, he or she should not be dissuaded from that decision by the producer or other representative of the company trying to “preserve the business.”

If you observe marketing irregularities or other areas of concern, please feel free to contact the Bureau of Insurance. Producer issues may be directed to Arthur G. Hosford, Jr., Maine Bureau of Insurance, 34 State House Station, Augusta, ME 04333.

 

Last Updated: August 22, 2012