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.)
How to Comply with NY 187
Compliance with NY 187 requires adherence to multiple steps and processes.
First, agents must complete the NY 187 Best Interests (BI) training requirement, offered by various NYSDFS-approved vendors, and listed here. This training must be completed prior to soliciting life business in New York on or after February 1st, 2020.
Second, agents must complete the carrier-specific product training. Most of the vendors providing courses for Step 1 also offer carrier-specific product training. Please work closely with your Highland licensing and contracting teams to ensure you’re accessing the correct courses to satisfy Step 2. For those advisors who do business in New York and have a Highland login, a list of carrier-specific resources will be available here. To obtain Highland login credentials, click here to access the Highland website, then click on ‘Login’ in the top right corner and select ‘Request an account’ from the dropdown. It is important to note that any application packet must be signed and dated on or after the training requirements have been completed.
The third step is the Suitability Review. This is where the carrier’s responsibilities come into play. Carriers processing business in New York will ensure that the proper NY 187 BI and carrier-specific training have been completed by the agent prior to accepting the application, and will then validate that the sale is suitable and in the consumer’s best interest.
All carriers doing business in New York will have a suitability form available to agents by February 1st. Please note that while carrier forms may have many similarities, there will also be differences, so please complete each attentively.
Expectations of NY 187
Below are the primary data points that should documented for any and all New York business submitted after February 1st. Agents must be mindful that documentation—including the omission of requested data by a consumer—is a key component of this regulation.
- Agents must document necessary consumer data to make a suitable and best-interest recommendation.
- Standard Requirements:
- Annual income
- Financial situation
- Financial objectives
- Intended use of the policy
- Existing assets
- Risk tolerance, including variability of premiums, death benefit, and fees
- Any other information provided by the consumer, which in the reasonable judgment of a prudent person is relevant to the suitability of the transaction.
- Additional requirements for cash-value life insurance:
- Financial experience
- Liquidity needs
- Liquid net worth
- Risk tolerance
- Tax status
- Standard Requirements:
- Agents must demonstrate that key elements are valid.
- Presentations made to the consumer must be a fair and accurate representation of the product, benefits, features, and drawbacks.
- Be sure to look at all products available. For example, when recommending a cash accumulation product, be sure to present Universal Life, Index Universal Life, Whole Life—and if securities-registered—Variable Universal Life.
- Agents must use accurate role description and disclosure.
- Agents may NOT call themselves a Financial Advisor or Financial Planner unless they are appropriately licensed and certified to provide financial advice, and are able to provide securities and other non-insurance services. Additionally, a “Financial Plan” cannot be merely a recommendation to buy life or annuity products.
- Agents must adhere to the insurance companies’ guidelines and form fulfillment.
NY 187 adds complexity to life and annuity transactions conducted within the state, but the foundational expectations are simple: Document, document, document, and do right by the consumer.
If you have questions about NY 187 or what is required of you, log in to Highland’s website and visit our New York Regulation 187 webpage. To obtain Highland login credentials, click on ‘Login’ in the top right corner and select ‘Request an account’ from the dropdown menu. If you have additional questions, please contact our Advanced Planning team at firstname.lastname@example.org.