Last week, the New York State Department of Financial Services proposed an amendment to state insurance regulations that would, according to its December 27th press release, “adopt a “best interest” standard for those licensed to sell life insurance and annuity products.” This new amendment “would require that the product that best reflects the customer’s interest be offered ahead of what is most profitable to the seller.”

Historically, New York has been the most aggressive state in regulating life insurance. In a recent blog entry, we noted that it was the first state to address the recent cost of insurance increases the industry has seen. This new amendment appears to be in direct response to the Trump administration’s decision to delay the implementation of many of the key provisions of the Obama administration’s Department of Labor fiduciary rule. That regulation required financial advisers serving retirement accounts to act in the client’s best interests and has become something of a political hot potato. The announcement quoted Governor Andrew Cuomo, a potential Democratic nominee in the 2020 presidential race, who said, “As Washington continues to ignore and roll back efforts to protect Americans, New York will continue to use its role as a strong regulator of the financial services and insurance industries to fight for consumers and help ensure a level playing field.”

New York is not the only state that has moved ahead in creating a best interest standard. In July 2017, Nevada implemented a law that applies to brokers working with both retirement and non-retirement accounts. California, Missouri, South Carolina, and South Dakota also hold brokers to a fiduciary standard, with other states providing similar, but lesser, requirements. (1)

Some financial service designations have their own standards. The newly revised and proposed Certified Financial Planner (CFP®) Board’s Code of Ethics and Standards of Conduct requires all who have that designation to act with “honesty” and “integrity”; furthermore, they must always act “in the client’s best interest,” placing the interests of the client above the interests of the CFP. (2)

The New York law applies specifically to any life insurance or annuity sale, including replacements, and requires the producer, when evaluating the suitability of a product, to act with “care, skill, prudence, and diligence that a prudent person familiar with such matters would use under the circumstances without regard to the financial or other interests of the producer, insurer, or any other party.” The reference to the financial interests of the producer is the major difference between this and prior suitability standards. In the past, suitability referenced the client’s objectives and financial situation but typically had no reference to compensation for the producer. The difference in compensation between products can be large, as life insurance and annuity payouts differ widely from carrier to carrier and even between producers. A higher payout does not necessarily mean an inferior product.

Over the past few years, Aaron Hanson, CLU, who heads up our Remediation Department, has reviewed many life insurance policy transactions. Most of these transactions were justified, but in some instances, he has come across replacements that would have provided higher risk and/or lower death benefit to the trust than the existing policy, the only real benefit being the commission paid to the producer. Had his team not caught those cases, they would have put the trust owned life insurance (TOLI) trustee at risk of indefensible litigation. So, we have a firsthand understanding of these issues. Life insurance is a complex financial interest, and it is easy for the consumer, even a well-meaning TOLI trustee, to be taken advantage of. (Note: We know of at least one high five-figure settlement paid by a TOLI trustee in 2017 on a “bad” replacement case we did not review.)

However, we also understand the challenge in regulating “best interest standards” with life insurance. How many regulators really understand the nuances of life insurance and a life insurance product sale or replacement? Perhaps the emerging answer might be having fee-based life insurance experts with nothing to gain review a life insurance policy transaction, taking the commission incentive out of the transaction analysis. There are many good fee-based life insurance experts in the field – not just us. Hopefully, the market will begin to recognize their value.


  1. Nevada Says Brokers Must Now Be Fiduciaries, Barron’s, June 16, 2017
  2. CFP Board, Revised Proposed Code of Ethics and Standards of Conduct, public release date December 20, 2017