The 10/10 Rule: Ineffective and spreading like wildfire
By Sheryl J. Moore
Moore Market Intelligence
Limiting surrender charges on annuities because of bad agent behavior is like outlawing automobiles because they are used in the process of drunken driving deaths.
More than a quarter of the states in our nation have insurance commissioners that have chosen to implement a rule which is fueled by false allegations against the indexed annuity industry. The 10/10 Rule is legislation (on the books or desk drawer) that limits annuity surrender charges to a maximum 10 years and a 10 percent penalty.
The rule applies to fixed, indexed and variable annuities. Each state’s variation of the 10/10 Rule is different; some states add a component for the annuitant’s age, others disallow market value adjustments, one state has even added a provision concerning one’s wealth (or lack thereof). In the end, if you live in one of the following states, your state insurance regulators have either implemented or are considering this rule:
- Illinois (repealed their 10/10 Rule)
- New Jersey
- South Carolina
The Interstate Insurance Product Regulation Commission (IIPRC), a growing sub-group of the National Association of Insurance Commissioners, uses a 10/10 variation as the template for their product filings. So, if an insurance company wants to save time and money, and get their annuity product automatically approved by 42 different states (if approved by IIPRC), their products must adhere to a specific variation of the 10/10 Rule.
The 10/10 Rule was implemented to help you protect annuity purchasers in your state, particularly senior purchasers. In short, you have implemented the rule in order to avoid seeing an 85-year-old great grandmother on a fixed income being swindled into purchasing an annuity where she will not receive her full cash value for 11 years or more.
In your efforts to prevent such situations, you have also limited the product offerings to all of the residents of your state. You may have considered big up-front premium bonuses as part of the problem, as they escalate surrender charges on an annuity. (Ever realize that this is a sought-after feature for millions of young savers?)
What has happened as a result of your rule is that insurance companies have merely found more creative ways to develop big bonus products, which are less transparent to the consumer. Instead of seeing bonuses as high as 11 percent on indexed annuities, now we have bonuses as high as 40 percent.
As you can see, this legislation did not do what you intended. I would suggest that you focus on the market conduct problem of agents suggesting unsuitable products and not make the annuity product the spotlight. Insurance companies
The 10/10 Rule has challenged you to get annuities approved in about a third of the United States over the past several years. Some of these states are in your top five biggest grossing states for sales of annuities. In order to remain competitive with other retirement income products, you’ve had to use your imagination to get agents and annuity purchasers’ attention.
Products with big up-front premium bonuses are more difficult to price today. Without the aid of a vesting schedule/recapture charge on the bonus, the highest up-front bonus you can fit into a 10-year product is 5 percent. It has become a challenge to offer attractive rates for your clients as well; longer surrender charges gave you the ability to offer higher caps, participation rates and lower spreads.
Historically low interest rates throw an additional wrench in the works. The commissions that your agents get paid on these products have dropped as well; you just cannot pay out higher than 7 percent on a 10-year annuity. As an unintended consequence, broker/dealers have adopted the 10/10 Rule for their “approved lists” of indexed annuity products.
So, the 55 percent of indexed annuity producers that have securities licenses must also be limited to a 10/10-friendly product, even if they are not selling in a 10/10 state. Today, your most popular indexed annuity is nearly identical to a large number of your competitors’ products. It is a constant struggle to develop a unique product that your distribution can sell.
Then 10/10 Rule affects the products you have available to sell to your clients. Not only will you lose products with relatively high transparent premium bonuses, but you will see a reduction in the annuity purchaser’s potential indexed gains (lower participation rates, caps and higher spreads).
Ultimately, the rule means lower commissions for you, as well. Have you noticed lately that many indexed annuities are using vesting schedules or recapture charges on their bonuses? These penalize the client if they surrender more than their 10 percent penalty-free amount.
This is just a friendly way for the insurance company and annuity purchaser to share in the risk of offering a bonus product. However, you’ll also notice that it takes a little more explanation to properly convey a vesting schedule to a senior client.
What about those new, higher bonuses which reach well into the double digits? You had better check to make certain that the bonus is credited to the client’s account value — it may only be available in the event of lifetime income payments being activated under a guaranteed lifetime withdrawal benefit (this process is similar to annuitization).
What you’ll likely see in your agent toolbox now is a slew of 10-year products with a first-year surrender penalty of 10 percent, a 6 percent premium bonus, a vesting schedule and a 7 percent commission. Insurance companies have maxed out the pricing on these 10/10-friendly products, resulting in a cookie-cutter product design; effectively commoditizing a once-varied industry.
Limiting surrender charges on annuities because of bad agent behavior is like outlawing automobiles because they are used in the process of drunken driving deaths. When used properly, indexed annuities of all durations are a valuable insurance product, which save Americans’ retirement dollars from the risk of loss due to market volatility.
I ought to know — I purchased an indexed annuity with the highest premium bonus I could find. After all, I don’t need income now, my money is qualified and I’ll be penalized by the government if I withdraw any monies before I turn age 59-and-a-half. If you ask me, I would have welcomed the opportunity to purchase a 20-year surrender charge annuity (even though such a product doesn’t exist today).
What can you do about this un-consumer-friendly rule? Write a letter to your state insurance division to let them know that you want options when it comes to annuities.
These are the only retirement income products that can provide safety and guarantees to purchasers, along with a tax deferral feature, all the while promising income they cannot outlive. If you don’t take action, you soon may not have a choice in the matter; the world may be full of cookie-cutter annuities.