The Replacement Dana Cannot Quite Justify
Dana has held a Wisconsin life insurance producer license since 2019 and is appointed by three carriers. In March she meets Ruth, 68, who owns a $180,000 fixed deferred annuity bought four years ago (surrender charge $9,000, expiring in 14 months) and a $250,000 15-year term policy issued in 2016. Dana recommends a 1035 exchange into a new fixed indexed annuity with a 10-year surrender schedule and a 1.1% annual income rider fee, replacing the term with permanent coverage, and moving $40,000 of Ruth's $60,000 bank savings into the annuity. The annuity wholesaler offers Dana $1,500 for each client she 'introduces' to its agent. Dana's two-year continuing education term ends June 30; she has 20 credits, including 2 ethics hours. Ruth's income is $2,100 a month in Social Security.
1. What must Dana do before Ruth signs the annuity application, and is the 1035 exchange defensible as she has proposed it?
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Replacement duties. A 1035 exchange into a new annuity is a replacement. Wisconsin's replacement rule requires Dana to obtain a signed notice identifying the existing contract and whether replacement is involved, provide a written comparison of the old and new contracts, leave a copy with Ruth, notify the existing insurer within a few business days, and retain the file. Notifying the old carrier matters - it triggers that carrier's own duty to give Ruth its numbers.
The suitability math Dana has to defend.
- Ruth is 68, lives on $2,100 a month, and her $60,000 of savings is her only liquid reserve.
- The existing contract has $9,000 of surrender charge left, expiring in 14 months. Exchanging now converts a certain $9,000 loss into a bet on a bonus.
- The new contract locks a 10-year surrender schedule running to age 78, plus a 1.1% rider fee charged against account value.
- The 7% bonus is not free money. It usually arrives with lower caps or participation rates, a longer surrender period, and recapture on early withdrawal.
Conclusion. Waiting 14 months costs nothing and saves $9,000. Dana cannot show a reasonable basis for the exchange unless she can document a quantified benefit that survives the surrender charge, the extra decade of lock-up, and the rider fee. She should decline to recommend it or narrow it sharply. Putting $40,000 of a $60,000 reserve into a 10-year illiquid product for a 68-year-old is also a hard sale to support. She must disclose what she is paid.
2. The wholesaler's $1,500-per-introduction offer: can Dana accept it, and what happens if she does?
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No. A person must be licensed in Wisconsin to solicit, negotiate, or sell insurance, and a producer may not share commissions or pay compensation to an unlicensed person for producing business. An 'introduction' that pays only when a sale results is compensation for solicitation, whatever label is used. Accepting it exposes Dana to license discipline and supports a finding of an unfair trade practice; the offer itself is a warning about the wholesaler's practices.
Practical steps: decline in writing, keep the record, and report a repeat offer to the Office of the Commissioner of Insurance. Dana's compensation must come from a licensed entity, and the annuity best-interest standard requires that she disclose it to Ruth.
Separate trap in the same file: Dana must not overstate the existing annuity's costs to push the exchange. Misrepresenting an existing contract to induce a lapse or surrender is twisting, and it is a separate violation from the unlicensed-compensation issue.
3. Is Dana compliant on continuing education, and what are the consequences if she is not?
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Wisconsin requires 24 continuing education hours per two-year license term, at least 3 of which must be ethics. Dana has 20 hours and only 2 ethics hours - she is 4 credits short, one of them ethics, with the term ending June 30.
Until she completes them she cannot renew. If the license lapses she cannot lawfully solicit, negotiate, or sell, and anything written after June 30 is business written without a license - which can affect commissions and the client's coverage. Late completion ordinarily means reinstatement, additional fees, and possibly a new application, so the practical answer is to finish the 4 credits (including at least 1 ethics) before June 30 and keep the certificates of completion.
She should also confirm her Wisconsin annuity training certificate is on file and current before she presents the indexed annuity at all, since annuity-specific training is a prerequisite to soliciting annuity sales.