Michael J. Sapyta, CFP®, CLU®

Suitability and Best Interests in Life Insurance and Annuity Transactions

The New York State Department of Financial Services (NYDFS) best-interest Regulation 187 (NY 187) is effective February 1, 2020 for life insurance transactions, and August 1, 2019 for annuity transactions within the state of New York.

What is NY 187?

NY 187 imposes a best-interest standard on recommendations to purchase, replace, or alter life insurance and annuity products sold in New York state. According to the NYSDFS, a goal of the amended regulation is to “fill in regulatory gaps” resulting from the elimination of the Department of Labor’s Fiduciary Rule.

Compliance with the duties and obligations connected with life and annuity product transactions fall on both producers and insurers. The new regulation significantly expands the producers’ duties and obligations by imposing a best-interest standard on all life and annuity products recommended to consumers. In general, producers must act in the “best interest” of the consumer with respect to purchase and replacement recommendations, and to post-issuance transactions of in-force products, including the exercise of any contractual provisions. Those transactions of in-force business that do not result in a commission are subject to “best-interest lite” standards.

The overarching theme of the regulation is to redefine the client’s best interest in insurance product recommendations in alignment with other fiduciary rules. Only the consumer’s interest can be considered when making a product recommendation. According to NY 187, this recommendation must reflect the care, skill, and diligence of a prudent person, and must not be influenced by a “producer’s receipt of compensation or other incentives.”

A dominant emphasis in the regulation is written documentation—disclosing the range of products recommended after an evaluation of the client’s needs based on relevant suitability information and consistent with the client’s risk tolerance. (A summary of the information required to support a product recommendation can be found at the end of this article.)

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When positioning life insurance from a perspective of potential cash value build-up, there are various product types to consider, each with its own straightforward, distinguishing features. For aggressive risk profiles, variable life products—which may be fully exposed to the ups and downs of the market—may be appropriate. On the other end of the spectrum, fixed universal or whole life contracts with guarantees may be more suitable for a risk-averse client.

In between those extremes are index universal life products, where the lines between similar products can become distorted with very different features. Guarantees and safeguards are available with many, but not all contracts and accumulation strategies vary from simple and conservative to complex and aggressive.

On its face, traditional index universal life (IUL) is simple and straightforward. The policy owner trades some upside potential in the form of a cap in return for downside protection in the form of a floor. But the reality of the current IUL marketplace is far more complex and nuanced than that.

The array of index account options available today is vast. They range from the simple and straightforward cap- and floor-tied; to the Standard & Poor’s 500 Index (S&P 500); to those with multiple underlying indexes; to some that may include global exposure and a variety of caps, participation rates, bonuses, and index credit multipliers; or any combination thereof.

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