How to judge annuity suitability

Understanding annuity suitability can help you make confident decisions about your retirement income. That’s because when you know the steps an insurance company takes to ensure suitability, you can spot red flags early. This knowledge supports better outcomes when purchasing an annuity and can protect your financial time horizon. 

Read on to learn more about the suitability requirements insurers follow and what you should review yourself to ensure annuity recommendations support your financial future.

What is suitability in insurance?

Suitability in insurance is the obligation of insurers and producers to recommend products that match a consumer’s profile. The National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation (Model #275) outlines this standard. Its 2020 “best interest” revisions help strengthen consumer protections. Although the NAIC does not directly monitor or enforce annuity suitability as this is done at the state level. 

This regulation has guidelines that insurers must base annuity recommendations on a reasonable belief that the product fits the consumer’s needs and financial objectives.

For products like annuities and life insurance, the standard is for the recommendations to be in the “best interest” of the consumer. Insurance companies can’t just suggest a product that meets a client’s needs; they have to prioritize those needs over their own financial gain.

Annuity recommendations are generally determined by factors such as:

• Investment objectives 
• Risk tolerance
• Liquidity needs
• Time horizon
  

Together, these factors can help paint a clear picture of a consumer’s financial situation and help insurers find the right solution on an individual level. As a reminder these obligations and guidelines are for recommendations made by an insurer or financial professional. In the scenario where a consumer is researching a product in a direct-to-consumer model, they are typically responsible for ensuring the annuity is suitable for themselves as no recommendation is made by the insurer.  

Suitability requirements for annuities

The NAIC model outlines four core obligations that insurers should follow to guarantee compliance with suitability standards. Each obligation is explained below.

Care obligation

Insurers must take time to get to know and understand the consumer’s financial situation. The idea is to make sure the annuity’s features and benefits fit what the client wants to achieve. This includes reviewing income sources, liquid net worth, and retirement goals. This allows annuity recommendations to feel personal and speak to the consumer’s unique needs.

Disclosure obligation

Insurance companies need to share annuity information in a clear way so consumers can make informed decisions that work for them. This includes items such as surrender charges, fees or compensation, investment options, and any limits on the contract. The disclosure obligation helps keep the annuity process transparent and reveals what fees and restrictions may apply.

Conflict of interest obligation

A client’s needs always come first, meaning insurers shouldn’t let commissions, bonuses, or other incentives influence their suggestions. In case there is a conflict of interest, insurers must flag and disclose it directly with the consumer. Fulfilling this obligation can builds trust with the client or prospect.

Documentation obligation

Insurers must document why an annuity recommendation is a good fit. This can include detailed questionnaires, financial profiles, and notes on the consumer’s goals and income needs to understand what matters most in their retirement plan. Documentation helps to avoid assumptions and helps insurance companies prove compliance with the transactions model.

NAIC suitability in annuity transactions

The NAIC Suitability in Annuity Transactions Model Regulation (Model #275) is a framework for making sure annuity recommendations fit each client’s goals and financial situation. Even though #275 is the national standard, each state can choose to adopt or adjust the rules. 

For example, Insurance Code § 10509.914 adds stricter rules for annuity recommendations to older consumers. If a Californian consumer aged 65 or older wants to replace an annuity with a surrender charge, the producer has to decide whether the new annuity has a significant financial benefit over the life of the policy.

Not only does this state law exceed the basic NAIC model, but it demonstrates how age-specific regulations for annuity recommendations vary by location. To find out how your area implements NAIC Model #275, you can review your local department of insurance website or consult state-specific regulations before purchasing an annuity.

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FAQs

What is the NAIC Suitability Model?

The NAIC Suitability Model provides guidelines that can help insurers and producers make annuity recommendations that complement the consumer’s circumstances. It lays out four obligations for insurers to follow: care, disclosure, conflict of interest, and documentation. Together, these obligations can help create a roadmap for thoughtful, personalized recommendations.

What should a suitability questionnaire include?

A suitability questionnaire collects information on a consumer’s financial profile and personal circumstances. Most questionnaires ask about annual income, assets, debts, and investment goals. With this information, insurers and producers can recommend an annuity that works for your current situation and upcoming retirement plans.

Can I opt out of giving personal info for suitability?

Financial and personal information is required to make a suitable annuity recommendation. If you choose not to disclose these details, the insurer may be limited in the products they can suggest, and some annuities might not be available at all.

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Stay ahead of your financial future with Gainbridge

Not sure an annuity is right for you? At Gainbridge, we offer a 30-day free look period to see whether our annuity fits your financial needs. If you change your mind within those 30 days, we cancel your annuity at no cost to you. 

If you want to take the next step, you can buy an annuity from Gainbridge in typically under 10 minutes and manage your contract entirely through our online platform. There are no hidden fees or commissions, and our licensed agents are available to help you understand your options.

Explore Gainbridge today and begin building a retirement strategy that can secure your income and protect your future.

This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

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