Suitability: Matching the Product to the Client

Suitability is the rule that a recommendation has to fit the person receiving it: their money, their needs, their existing coverage and their plans. Wisconsin writes it into its rules product by product, and the standard is strictest where a wrong recommendation costs the most: annuities, Medicare supplement and long-term care insurance.

The baseline: “not unsuitable”

For individual life insurance and annuities, s. Ins 2.16 (6), Wis. Adm. Code, says no insurer or intermediary may recommend a purchase or replacement “without reasonable grounds to believe that the recommendation is not unsuitable to the applicant.” The producer must “make all necessary inquiries under the circumstances” to reach that belief. Section Ins 3.27 (7) sets the same standard for individual accident and sickness policies. Neither rule applies to an individual policy issued on a group basis.

Read the double negative carefully. The baseline does not require the single best policy on the market. It requires reasonable grounds, built from questions, to believe the product does not work against the client. A recommendation made without asking anything has no grounds at all. How much you must ask depends on the sale: a small final-expense policy calls for fewer questions than a large permanent policy funded from savings.

You must also be able to prove you asked. Section Ins 6.61 (10) requires every intermediary to keep records for 3 years showing that the suitability inquiry and replacement procedures were followed for each individually issued life and accident and health contract written or replaced.

Annuities: the best interest standard

Annuity sales carry a higher standard, set by statute. Under s. 628.347 (2) (a), Wis. Stat., when you recommend an annuity you must act “in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the financial interest of the intermediary or insurer ahead of the consumer’s interest.”

You meet that standard by satisfying four obligations: care, disclosure, conflict of interest and documentation. These duties are regulatory: they do not make you the client’s fiduciary, but the Commissioner enforces every one.

The care obligation

Section 628.347 (2b) (a) requires reasonable diligence, care and skill to do four things:

1. Know the consumer’s financial situation, insurance needs and financial objectives.
2. Understand the available options after a reasonable inquiry into the options available to you.
3. Have a reasonable basis to believe the recommended option effectively addresses the consumer’s situation, needs and objectives over the life of the product.
4. Communicate the basis for the recommendation to the consumer.

“Knowing the consumer” has a defined content. You must make reasonable efforts to obtain the consumer’s profile information before you recommend anything. The statute lists 14 items:

Personal and financial picture	Goals and limits
Age	Financial objectives
Annual income	Intended use of the annuity
Financial situation and needs, including debts	Financial time horizon
Financial experience	Liquidity needs
Existing assets and financial products	Risk tolerance, including willingness to accept non-guaranteed elements
Liquid net worth	Insurance needs
Tax status	Financial resources used to fund the annuity

You also need a reasonable basis to believe the client would benefit from the annuity’s features, such as tax-deferred growth, annuitization or a death or living benefit. If a client will need the money soon and has no use for tax deferral, a deferred annuity with a long surrender period fails that test however good its interest rate.

The care obligation has limits. It does not require recommending the annuity that pays the lowest compensation (s. 628.347 (2b) (e)), considering products you are not licensed to sell, or monitoring the annuity after the sale.

Replacing an annuity

When the recommendation is to exchange or replace an existing annuity, you must consider the whole transaction (s. 628.347 (2b) (g)):

• whether the client will pay a surrender charge, start a new surrender period, lose existing death, living or other benefits, or pay higher fees;
• whether the new product would substantially benefit the client compared with the old one over the life of the product; and
• whether the client has had another annuity exchange or replacement, particularly within the preceding 60 months.

A modestly higher rate rarely outweighs a fresh surrender period. A history of recent exchanges is a warning that the client’s money is being moved for someone else’s benefit.

When the client will not cooperate

Clients sometimes refuse to share information or insist on a product you did not recommend. The statute answers with documentation:

• If you recommend an annuity, make a written record of the recommendation and its basis.
• If the client refuses to provide profile information, obtain a signed statement documenting the refusal and the client’s understanding of what it means.
• If the client buys an annuity you did not recommend, obtain a signed statement acknowledging that the transaction was not recommended.

Your care obligation does not apply when you made no recommendation, when it rested on inaccurate information the client gave you, when the client refused profile information and you recommended nothing, or when the client acted on their own decision (s. 628.347 (2b) (h)). The signed statements prove which situation you were in.

Two kinds of pressure are forbidden. You may not conceal profile information from the insurer or discourage the client from providing it (s. 628.347 (2b) (be)). And you may not discourage a client from truthfully answering the insurer’s request to confirm that information, from filing a complaint, or from cooperating with an investigation (s. 628.347 (3m)).

The rest of the framework

Before the sale you also make the disclosures s. 628.347 (2c) requires about your role, the insurers you represent and how you are paid. The insurer may not issue the annuity without its own reasonable basis to believe it addresses the client’s situation (s. 628.347 (3) (am)). Records behind the recommendation are kept for 6 years after the transaction is completed (s. 628.347 (7) (a)). Before soliciting any annuity, you must complete a one-time Commissioner-approved course worth at least 4 continuing education credits, plus the insurer’s product training (s. 628.347 (4m)). Violations bring forfeitures and license suspension or revocation.

Sidenote

Two standards, one habit

“Not unsuitable” (life and health) and “best interest” (annuities) are different tests, but they are satisfied the same way: ask the questions first, recommend second, and write down why.

Medicare supplement and long-term care

Medicare supplement. In recommending the purchase or replacement of a Medicare supplement policy, you must make reasonable efforts to determine whether it is appropriate (s. Ins 3.39 (25) (a)). The insurer must make every reasonable effort to find out what accident and sickness coverage the applicant already has (s. Ins 3.39 (24) (a) 3.). One result is absolute: a sale that would leave a person with more than one Medicare supplement policy is prohibited (s. Ins 3.39 (25) (b)).

Long-term care. Each insurer marketing long-term care insurance must develop suitability standards, train its agents in them, and use them, and agents must use the insurer’s standards when they sell (s. Ins 3.46 (16)). At or before the application, the applicant receives the Long-Term Care Insurance Personal Worksheet, which gathers information on:

• the ability to pay for the coverage;
• the applicant’s long-term care goals or needs, and the advantages and disadvantages of insurance for meeting them; and
• the values, benefits and costs of any existing insurance compared with the recommended purchase.

If the applicant does not meet the insurer’s financial suitability standards or declines to provide the information, the insurer may reject the application or must send a letter asking the applicant to confirm that they still want the coverage. Information from the worksheet may not be sold or disseminated outside the insurer or agency.

Service members

Section Ins 2.19, Wis. Adm. Code, governs life insurance and annuity sales to active-duty service members. A life insurance product with a side fund may not be recommended to a service member in pay grades E-4 and below unless there are reasonable grounds to believe the death benefit, standing alone, is suitable. If that service member is enrolled in Servicemembers’ Group Life Insurance, the sale is presumed unsuitable unless a needs assessment shows that existing military coverage, survivor benefits, savings and other insurance are not enough (s. Ins 2.19 (7) (u)).

Property and casualty sales

Wisconsin has no product-specific suitability test for property and casualty sales like the ones above. The general rule still reaches you: a communication that is “misleading because of incompleteness” is a misrepresentation under s. 628.34 (1) (a). Telling a client who keeps business inventory in the basement that a homeowners policy covers “everything in the house,” without explaining its limits on business property, is a misleading recommendation, whatever the rate.

Lesson summary

• Individual life, annuity and accident and sickness recommendations need reasonable grounds, built from inquiry, to believe they are not unsuitable, with records kept for 3 years.
• Annuity recommendations must be in the consumer’s best interest under s. 628.347, through the care, disclosure, conflict of interest and documentation obligations.
• The care obligation requires reasonable efforts to gather 14 items of consumer profile information before recommending.
• Before recommending an annuity replacement, consider whether it would substantially benefit the client, weighing surrender charges, lost benefits, new fees and any exchange in the preceding 60 months.
• Refusals and unrecommended purchases are documented with signed statements.
• A sale that gives anyone more than one Medicare supplement policy is prohibited, and long-term care sales use the insurer’s suitability standards and the personal worksheet.
• Side-fund life insurance sold to a service member in pay grade E-4 or below who has Servicemembers’ Group Life Insurance is presumed unsuitable.