By Linda Koco
“Do annuities earn money, interest or a return?” That was among the many questions that regulators and annuity industry participants took up this week during a phone conference on a consumer document about deferred annuities.
The ensuing discussion may be of interest to annuity advisors, because the questions raised in the session touch on issues that advisors sometimes encounter when defining and explaining deferred annuities to consumers. Consider:
“If an annuity is described as a product that is earning money, how does that differ from receiving an income?” asked one session participant in response to the question about whether annuities earn money, interest or a return.
If you say that annuities produce earnings, that suggests the value will be positive, but that is not always the case, said another.
Well, said another participant, “value” is a term that consumers will get. Yes, agreed another, that’s a term that can go either way, positive or negative.
"Value" is good, said a third person, as long as we remove the term “earn,” which suggests only positive changes.
A consensus formed around the idea of speaking about deferred annuities in terms of policy values, not earnings.
It’s not easy
Exchanges like this should be of interest to annuity advisors, who encounter similar challenges when going over key points about deferred annuities with their customers. What is the correct definition, and what will the client understand? Most would agree, this is not as easy as describing a pencil to a grade-schooler.
The discussion, and many more like it, occurred during a “word-smithing” session on a proposed new Buyer’s Guide for Deferred Annuities from National Association of Insurance Commissioners (NAIC). The terminology and concepts decided upon in sessions like this, subject to consumer input, will go into that guide.
The guide only discusses deferred annuities, pointed out Jim Mumford, who heads the NAIC Annuity Disclosure (A) Working Group that hosted the session and who is Iowa’s First Deputy Commissioner. It will update the NAIC previous buyer’s guide which was published before NAIC had adopted its suitability and disclosure models, Mumford said.
The session ran for more than two hours. The bulk of it focused on eyeballing words, sentences and passages in the proposed guide in light of whether they are accurate, too specific, clear enough and/or helpful to consumers.
Following are a few more examples of the word-smithing exchanges. (Since many people participated in the discussion and since not all identified themselves when speaking, the various speakers are not identified here.)
What is an illustration? One participant said the document’s current definition of “illustration” is not good. (It appears in a callout box along with definitions of “contract” and “disclosure.”)
The definition in question says that an illustration is “a document that estimates the money your annuity might earn. Ask what’s guaranteed and what isn’t and what assumptions were made to create the illustrations.”
Instead, the commenter suggested saying it’s a document that shows how the product works, not what the value is.
How about inserting the term “personalized” into the definition, as in “a personalized illustration?” someone else suggested.
One person suggested a definition that conforms more to the one used in the NAIC disclosure model regulation.
But the disclosure model definition is more technical, responded another, pointing out that what’s needed is something more consumer friendly—such as, it “shows how your annuity might work, based on the assumptions.”
Maybe it should say that an illustration “shows how your annuity features might work” and then continue with the next sentence in the working draft (Ask what’s guaranteed and…), said the next commenter.
“That makes it clear…it’s a little more descriptive,” was the response.
Beneficiary or survivor
Another discussion explored whether the guide should use the term “beneficiary” or “survivor.” The consumer representatives who are part of the working group prefer the term “survivor,” said one commenter. That’s because they think the word “beneficiary” sounds legalistic and contractual.
“I agree, ‘beneficiary’ is more a term of art than ‘survivor’,” said another.
But there may be an argument for using “beneficiaries,” said a third, alluding to some deeper meanings.
In response, one word-smither suggested putting the term “survivors” at the end of the document,
which has a list of questions that consumers might ask. Why not say, “How do I ensure that my survivors get money from my annuity?”
Why not say “designated survivor” instead of just “survivor”? asked another.
Okay, let’s work on a question for that, was the next comment.
How about saying, upon the first reference, “the survivor you have designated (beneficiary) and then using the term ‘survivor’ after that?” responded the word-smither.
The collective thought seemed to center around that last idea.
On it went throughout the session. Commenters took up a wide range of other topics, peeling back statements to see what consumers might see or think.
Some of the other topics included: whether consumers would understand reference to financial markets, whether to make reference to specific indexes, how to define monthly or daily averaging (in fixed indexed annuities), pointing out that subaccount values in variable annuities can go up and down, how best to describe a market value adjustment, and what to say and not say about partial withdrawals.
At various points, Mumford would reiterate that the group needs to answer the question, “What is important to the consumer?”
For example, in a discussion about whether to remove the word “risk” in a paragraph about variable annuities, he said the goal is to point out the differences between variable annuities and deferred fixed annuities, “so if you remove reference to risk, you remove the point we need to make.”
Mumford did offer a suggestion on how this might be done. But for purposes here, it’s worth taking a high level look at that moment—from the perspective of advisors who go face-to-face with consumers on a daily basis. Discussing risk, safety, product features and more is what annuity advisors do when educating, selling and providing ongoing service to consumers.
They, like the working group experts, are always considering what to say and not say about annuities, how much to say and how to say it. They want to be clear. They want to be accurate. The few examples shown here indicates that it does take thought and effort.
When the final document is approved for use, advisors should at least have some reassurance that the wording in the resulting guide has been combed through by a number of the country’s leading annuity regulators and industry experts. It will not be highly technical, like a prospectus. But it will provide a balanced overview that might help facilitate discussion. It might even provide advisors with suggested language to use, if they get stuck on one point or another.
Also worth noting is that consumer representatives have been providing input all along the developmental process, Mumford said. During the session, the group often referred certain points back to those representatives for further review and input. This too may be a source of reassurance.
The session participants included regulators from several states plus representatives of several major industry trade groups, including NAFA, Insured Retirement Institute, American Council of Life Insurers, American Academy of Actuaries, and National Association of Insurance and Financial Advisors. Also speaking were representatives of a few insurance companies. The working group will have yet another session on March 22.
Once the proposed guide is in final draft form, the working group will send it on to NAIC’s Life Insurance and Annuities (A) Committee for consideration.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].
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