Do you sell insurance to clients? Then listen up. A new rule governing who can sell indexed annuities, and increased scrutiny of senior designations, could have an important impact on how you do business with clients.
Registered reps could benefit from the new Securities and Exchange Commission rule, which would require anyone who sells indexed annuities to hold not just an insurance license, but a series 7 securities license, too. Granted, the rule, 151A under the Securities Act of 1933, wouldn’t take effect until Jan. 12, 2011—and only then if it isn’t overturned in the courts first.
Equity indexed annuity sales have averaged nearly $25 billion annually over the past three years ending in 2008, Advantage Compendium reports. So registered reps could be on the receiving end of a large market for guaranteed index products.
An equity-indexed annuity is a contract with a life insurance company that earns interest in the accumulation phase based on the performance of a stock index or other securities. One of the most common indices used is the Standard & Poor's 500 Composite Stock Price Index (the S&P 500).
Equity-indexed annuities calculate and credit interest according to a formula based on changes in the index, notes Jack Marrion, president of Advantage Compendium, St. Louis. Like other fixed annuities, indexed annuities promise to pay a minimum guaranteed interest rate—even if the index-linked interest rate is lower.
For example, many single premium annuity contracts guarantee the minimum value will never be less than 90 percent or 100 percent of the premium paid, plus at least 3 percent in annual interest, less partial withdrawals.
Although the sale of indexed annuities would become the sole domain of registered representatives who have an insurance license, Marrion believes that the new rule will hurt overall indexed annuity sales: Too few licensed insurance agents will get the series 7, and registered reps might not pick up the slack.
Registered reps “prefer to sell variable annuities with guaranteed lifetime withdrawal benefits,” he says. “Many reps think they can manage clients’ money and get better risk-adjusted rates of return over the longer term [with variable annuities] than with an indexed annuity.”
Rule 151A is not a sure thing, of course. A federal appeals court in Washington is slated to hear arguments on a lawsuit challenging the SEC rule. The suit was filed by a coalition of insurance companies and independent marketing organizations.
“I think 151A will be overturned because the SEC has no case law backing up the justification for the rule,” he says.
But others believe that if the new rule stays on the books more insurance agents will, in fact, obtain securities licenses, according to a report by Insurance NewsNet.com. In that case, registered reps might have more competition for sales of the product.
Special Senior Designations Under Scrutiny—Again
Thinking of getting a designation to give you more credibility in dealing with senior citizens when selling life insurance and annuities? Don’t waste your money. In September 2008, the National Association of Insurance Commissioners, Kansas City, adopted a model regulation, which establishes standards for senior-specific certifications and designations. The law outlines abusive tactics using senior-specific designations that are in violation of state laws.
"Especially in these trying economic times, Americans should be able to trust the people who handle their money,” says Sandy Praeger, former NAIC president and Kansas Insurance Commissioner. “State insurance regulators will take swift action against those who would mislead consumers with titles that imply special expertise that doesn’t really exist.”
So far this year, Alabama, Arkansas, Iowa and New Mexico have adopted the model law. Another nine states have started the legislative process to adopt the model regs. Praeger says that sales abuse problems have stemmed from individuals selling insurance products, using such designations as certified or accredited retirement planner, senior advisor and senior consultant.
An investigation by the U.S. Senate’s Special Committee on Aging in 2007 found that many designations have limited or no value in regard to advising seniors on financial matters.
Often registered reps obtain these designations by attending a weekend seminar and passing an open-book multiple choice test.