Presented by the Insurance Agents & Brokers Liability Practice Group

Pennsylvania Imposes Additional Requirements on Insurance Agents and Companies Regarding the Sale or Replacement of Annuities  

Edited by Timothy G. Ventura, Esq.

On June 28, 2018, Pennsylvania Governor Tom Wolf signed into law certain amendments to Section 429 of the Insurance Company Law of 1921 with regard to the sale or replacement of annuities.

The House Bill was sponsored by Sen. Don White of Indiana County, Chairman of the Senate Banking and Insurance Committee, and Rep. Marguerite Quinn of Bucks County. The legislators were motivated, at least in part, by what had happened to Thomas Welsh, age 80, and Rosemary Welsh, age 78, of Bethel Park borough, a suburb of Pittsburgh. The Welshes owned four fixed annuities. Prior to the maturity dates, the couple was convinced by a husband and wife insurance agent team to replace the four annuities with four new annuities. The annuities were replaced within the “surrender period” after issuance of the annuity (typically one to seven years or more depending upon the type of annuity), resulting in surrender charges of $19,000. The Welshes maintained that their agents did not tell them about the surrender charges, only that the new annuities would have a higher interest rate. The agents made more than $14,000 in commissions on these sales.

After investigation by the Pennsylvania Insurance Department, the agents’ licenses were revoked once it was determined that the agents had engaged in similar practices with 42 other consumers, resulting in combined surrender charges of $159,000 and more than $136,000 in commissions.

Under the prior law, the agent or insurance company (if the product was sold directly to the consumer and not through an agent) needed to determine the consumer’s financial and tax status, investment objectives, and related information that the seller considered “reasonable.” The amendments impose new obligations on the seller to ascertain additional “suitability information” prior to the sale or exchange of an annuity.

Specifically, the new law requires the seller to determine the following information about the consumer before making an annuity recommendation:

  • Age
  • Annual income
  • Financial situation and needs, including the financial resources used to fund the annuity
  • Financial experience
  • Financial objectives
  • Intended use of the annuity
  • Financial time horizon
  • Existing assets, including investment and life insurance holdings
  • Liquidity needs
  • Liquid net worth
  • Risk tolerance
  • Tax status

After determining the relevant suitability information, the seller must also have reasonable grounds for believing: (a) that the recommendation is appropriate for the consumer based upon the suitability information stated above; (b) that the purchaser has been reasonably informed of various features of the annuities, including the surrender period and potential surrender charges; and (c) the tax penalties for early withdrawals, fees, and the market risk of the underlying account in which the funds are placed at the time of the purchase or replacement of a variable annuity.

In addition to these requirements, the amendments also impose new obligations on insurance companies to approve the sale or replacement of an annuity. The insurer must: (a) maintain reasonable procedures to inform its producers of the Act’s requirements; (b) establish standards for producer product training with regard to compliance with the Act; (c) provide product-specific training and training materials to explain all material features of the annuity products; and (d) maintain procedures for review of each recommendation before issuing the annuity in order to detect recommendations that are not suitable.

Although the majority of the amendments relate to fixed annuities considered to be insurance products, it also imposes requirements on the sale of variable annuities that are considered to be securities. In such cases, all such sales must be in compliance with the requirements of the Financial Industry Regulatory Authority.

*Jamey is a shareholder in our Pittsburgh, Pennsylvania office who can be contacted at or 412.803.1180.


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