What You Need to Know About the 10/10 Rule
January 4, 2011 by Sheryl J. Moore
We are receiving hundreds of calls since Florida enacted a variation of the 10/10 Rule effective January 1, 2011. For that reason, I thought that a little clarification about the rule was warranted. Here are some things you need to know about the 10/10 Rule:
1. The 10/10 Rule is desk-drawer legislation that was initially adopted by some state insurance divisions
2. The 10/10 Rule concerns the Standard Non-Forfeiture values on all fixed annuities: traditional fixed, fixed indexed, and multi-year guaranteed
3. This rule limits surrender charges to ten years and 10% in the first year of the annuity, for states using the rule
4. Each state has it’s own twist on 10/10: some states will permit a first-year surrender penalty of 15% if there is a guaranteed up-front bonus of 5% on the contract; some states add an age component to the rule; some states won’t allow MVAs on the contract
5. The 10/10 Rule is not only a state approval issue, but also a distribution issue, as B/Ds have been using 10/10 as the basis for their “approved lists” since Notice to Members 05-50 was issued by FINRA (then known as the NASD) in August of 2005
6. There have been 13 states that have used some variation of the 10/10 Rule to-date:
a. Alaska
b. Connecticut
c. Delaware
d. Florida
e. Illinois (no longer 10/10)
f. Minnesota
g. New Jersey
h. Oregon
i. Pennsylvania
j. South Carolina
k. Texas
l. Utah
m. Washington
7. There is also one more state that is currently considering implementation of a 10/10 Rule (Wisconsin)
8. The most recent state to adopt a variation of 10/10 is Florida, prior to that, Texas
9. Florida’s passing of the “Safeguard Our Seniors Act” was unprecedented in terms of its 10/10 requirements, as it specified an exemption for the rule. The Florida version specifically notes that the rule does not apply to annuitants under age 65. However, for those aged 65 and over, the 10/10 Rule applies. There is an exemption, however, for “accredited investors.” An accredited investor is defined as someone with 1) a net worth/joint net worth that exceeds $1 million at the time of purchase, or 2) has had an individual income in excess of $200,000 in each of the two most recent years or joint income with spouse in excess of $300,000 for each of those years (and also has a reasonable expectation of reaching the same income level in the current year). Even though Florida allows this exemption, there are currently only two insurance companies that are permitting the exemption with their sales force.
You all likely know that I do not endorse the restricting of surrender charges on annuities. Limiting surrender charges also limits commissions paid to the agent and interest credited to the purchaser. The longer period the insurer has to invest the purchaser’s premium payment, the greater gain they can pass-on to the purchaser. As a young saver, I would be LIVID if my state insurance commissioner decided that a product with a surrender charge of more than ten years was not suitable for me. I won’t be taking the money out any time soon: BRING ON THE DOUBLE DIGIT SURRENDER CHARGES! Why should I have to keep rolling my annuity over every ten years and paying another agent another commission each time? In essence, your grandma might have enough wits about her to purchase an $80,000 Cadillac, but she doesn’t have the choice of purchasing an insurance product that can guarantee her an income she cannot outlive. Ridiculous. This is wrong. However, the insurance commissioners seem to think that the best way to limit exposure to bad agent behavior is to adopt rules such as 10/10.
Until I am elected President, it looks like 10/10 is here to stay. Keep making suitable sales. sjm
