Annuity Disclosure, Variable Contracts and Life Sold with Mutual Funds

Annuities and variable products sit where insurance meets investing. Wisconsin’s rules make sure the client sees the guarantees, the costs and the risks before paying, and sees the insurance separately from any investment sold alongside it.

Annuity Disclosure (s. Ins 2.15)

What it covers

Section Ins 2.15, Wis. Adm. Code, applies to the sale of deferred annuities and deposit funds, including deposit-fund riders on life policies. Its purpose is to help the buyer pick an annuity suited to their needs, understand its basic features, and compare similar plans. The main exemptions are (s. Ins 2.15 (3) (b)):

• immediate annuities, meaning payments begin within 13 months of issue;
• individual retirement accounts and individual retirement annuities;
• group annuities under employer retirement plans; and
• variable annuities and other registered products sold in compliance with federal securities disclosure rules. Even then, the buyer’s guide must still be delivered with a variable annuity.

What the buyer receives, and when

Before the insurer accepts the first payment, the producer gives the buyer:

1. A buyer’s guide, which is the NAIC Buyer’s Guide for Deferred Annuities (2013), or its fixed or variable edition, matching the product (s. Ins 2.15 (4) (c)); and
2. A Preliminary Contract Summary or a Contract Summary (s. Ins 2.15 (8) (a)).

The Preliminary Contract Summary is the pre-sale disclosure of the contract’s guarantees, cash values, fees and surrender charges. The Contract Summary must be delivered with the contract if it was not given earlier, and the insurer provides one on reasonable request (s. Ins 2.15 (8) (b), (c)). An insurer that sells without intermediaries may wait until delivery, but only if it guarantees a full refund of premium during a 30-day period starting when the buyer receives the Contract Summary and guide.

The Contract Summary

The Contract Summary is a separate document titled “Contract Summary.” Beyond the names and addresses of the producer and insurer, it shows (s. Ins 2.15 (6)):

• any guaranteed death benefit during the deferral period;
• the guaranteed annuity payment at the scheduled start date, assuming all scheduled payments are made;
• illustrative payments on current rates, if shown, which may be no higher than the current dividend scale, excess interest rate and annuity purchase rates support;
• a prominent warning, if guaranteed cash values can be less than the payments made, that the contract may result in loss if kept for only a few years, and for how many years that is true;
• premiums and guaranteed cash surrender values for the first 5 years and representative later years, including the 10th and 20th contract years and an age from 60 through 65 (or the scheduled start of payments);
• the yield on gross payments at the end of 10 years and at the start of annuity payments, on a guaranteed basis and, where current values are shown, on an illustrative basis;
• the interest rates used; and
• the date it was prepared.

Unless the contract says otherwise, payments are assumed to begin at age 65 or 10 years from issue, whichever is later (s. Ins 2.15 (7) (e)). Any later statement showing the contract’s current value must also show its current guaranteed cash surrender value (s. Ins 2.15 (8) (d)).

Presentation rules

Annuities may not be described as the same as a savings account or bank deposit, and passbook-style contracts are prohibited (s. Ins 2.15 (9) (h)). Dividends or excess interest must be described as not guaranteed (s. Ins 2.15 (9) (d)). Any illustration at a rate above the guaranteed rate must show, with equal prominence, the same illustration at the guaranteed rate. If the contract has no cash surrender benefit before payments begin, every illustration must say so prominently (s. Ins 2.16 (23)).

The producer’s own disclosure

Wisconsin’s best interest law adds a disclosure about the producer. Before recommending or selling an annuity, the producer must give the consumer a disclosure form, substantially similar to the NAIC’s model form, that states (s. 628.347 (2c), Wis. Stat.):

• the scope of the producer’s relationship with the consumer and role in the sale;
• whether the producer is licensed to sell fixed annuities, fixed indexed annuities, variable annuities, life insurance, mutual funds, stocks, bonds and certificates of deposit;
• whether the producer sells products from one insurer, from 2 or more insurers, or from 2 or more insurers while primarily contracted with one;
• the sources and types of cash and noncash compensation the producer receives; and
• the consumer’s right to ask for more information about cash compensation.

On request, the producer gives a reasonable estimate of the cash compensation, which may be stated as a range. The producer must also have a reasonable basis to believe the consumer understands the surrender period and charges, potential tax penalties, fees, rider costs, limits on interest, possible changes in non-guaranteed elements, and market risk.

Sidenote

Two disclosures, two purposes

The Contract Summary discloses the product. The s. 628.347 form discloses the producer: who you work for and how you are paid. A Wisconsin annuity sale needs both.

Variable Contracts

Definitions

Variable contract

“A policy or contract which provides for insurance or annuity benefits which may vary according to the investment experience of any separate account maintained by the insurer as to the policy or contract” (s. Ins 2.13 (2) (b)).

Separate account

An account an insurer establishes, with the Commissioner’s approval, to hold amounts that provide benefits “payable partly or wholly in variable dollar amounts” (s. 611.25 (2), Wis. Stat.).

In a fixed product, the insurer invests premiums in its general account and bears the investment risk. In a variable product, the client’s money goes into a separate account, and benefits rise and fall with its investments. To the extent the contract provides, the separate account’s assets equal to its reserves and other contract liabilities cannot be charged with liabilities from any other business the insurer conducts (s. Ins 2.13 (4) (c)). Variable life and variable annuities form their own class of insurance (s. Ins 6.75 (1) (b)).

Contract and illustration requirements

Every variable contract must describe the essential features of how the insurer determines the variable benefit, state that the dollar amount may decrease or increase, and display conspicuously on its first page that the benefits are on a variable basis, with directions to where the details are found (s. 632.45 (1), Wis. Stat.; s. Ins 2.13 (6) (a)). No illustration may project past investment results into the future or predict future results. Hypothetical assumed rates of return are allowed (s. Ins 2.13 (6) (b)).

An individual variable annuity with scheduled periodic payments must provide a grace period of 30 days or one month for payments after the first, and a right to reinstate within 3 years after a missed payment (s. Ins 2.13 (6) (c)). At least once each contract year after the first, the insurer reports the separate account’s investments and the contract’s value or units (s. Ins 2.13 (10)).

Who may sell them

Variable life and variable annuity products are a separate major line of authority (s. Ins 6.50 (2) (a) 6.). A life license alone is not enough: anyone selling a variable contract must hold the variable license (s. Ins 2.13 (12m)), and the application requires proof of FINRA registration for Series 6 or Series 7 (s. Ins 6.59 (4) (an)). Registered variable contracts are also subject to federal prospectus delivery requirements (s. Ins 2.07 (3) (h)).

Life Insurance Sold with a Mutual Fund (s. Ins 2.09)

Some producers sell life insurance and mutual funds together, for example a term policy paired with a fund investment, or a combined plan billed as one payment. The risk is that the client cannot tell what the insurance costs or what it provides. Section Ins 2.09 applies whenever the insurer or agent knows that the sale of a mutual fund or other security is, has been, or may become part of a life insurance, annuity or endowment transaction.

In such a sale, the client must receive a clear written proposal no later than when the solicitation or proposal is made (s. Ins 2.09 (5)). A “proposal” includes any estimate, illustration or statement representing premiums, dividends, terms or benefits. The proposal must (s. Ins 2.09 (6)):

• be dated and signed by the agent;
• name the insurer;
• be accurate and complete, with no misleading statements;
• show the life insurance premium separately from any other charge;
• show the life insurance values and death benefit separately from other values and benefits; and
• keep everything about the life insurance separate from everything else.

Every later bill or statement must likewise show the life insurance premium separately (s. Ins 2.09 (7)). Any violation is deemed a misrepresentation of the life insurance (s. Ins 2.09 (8)).

Lesson summary

• Deferred annuity buyers receive the NAIC buyer’s guide and a Preliminary Contract Summary or Contract Summary before the first payment.
• The Contract Summary shows guarantees, fees, loss warnings, values for the first 5 years and later benchmarks, and yields.
• Annuities may not be presented as bank deposits; illustrations above the guaranteed rate need an equal guaranteed-rate illustration.
• Before an annuity sale, the producer discloses their role, licenses, insurers represented and compensation.
• A variable contract pays benefits that vary with a separate account’s investment experience.
• Variable illustrations may use hypothetical rates but may not project past performance.
• Selling variable products requires the variable line and FINRA Series 6 or 7 registration.
• Life insurance sold with a mutual fund requires a signed written proposal showing the insurance separately.