Where the buck stops: facing lawsuits, unhappy customers and bad press, annuity writers revamp how, and to whom, they issue policies.(Life: Annuities)

[ILLUSTRATION OMITTED]

Financial advisers sometimes urge clients to put into writing why they are buying an investment product. Doing so, they reason, allows clients to review their rationale and helps them to stay on course when times get tough.

Now insurers who sell individual fixed and indexed annuities are embracing that kind of approach to ensure that policyholders buy products for the right reasons and will be comfortable owning them in the future. Under new programs put into place last year, insurers are requiring more information about prospects and are playing the role of referee on the suitability of each transaction.

The goal of the new programs is to reduce future complaints and it is no coincidence that annuity writers are becoming more involved in sales suitability. In 2007, many news stories were published about elderly prospects buying indexed annuities with steep surrender charges, limited access and surrender periods that often stretched 15 years or more. Regulators reported receiving thousands of complaints from buyers of such products, and Minnesota Attorney General Lori Swanson filed lawsuits against three insurers, charging that some sales were unsuitable.

Meanwhile, 35 states have adopted their versions of the National Association of Insurance Commissioners' Suitability in Annuity Transactions Model Regulation, which requires annuity writers to be ultimately responsible for sales suitability. The NAIC passed the original version, which applied only to seniors, in 2003, and made it applicable to buyers of all ages in 2006. Suitability is regulated differently for variable products, which can be sold only by people with a securities license.

[GRAPHIC OMITTED]

Defining a Good Sale

A major problem for annuity writers is that they are not present with an independent agent and client at the time of sale. That's when the annuity customer and the company reach the understanding that is at the heart of suitability, said Mike Midlam, president and chief executive officer of Asset Marketing Systems Insurance Services LLC, an independent distributor based in San Diego.

"It's an understanding about the …