White Paper: Rebates, Gifts, and Inducements

Most states prohibit rebates and have made many inducements illegal. That is paying, allowing, giving, or offering something that is not specified in the contract as a way to induce the purchase of an insurance contract. When something is considered a rebate or inducement varies from state to state. Some states provide additional guidance about what the statutory language means, but not all states do. For many, the law is the only guidance.

There are two states that are the big exceptions to the rule when it comes to rebating. Florida and California. These two states do not prohibit rebating, although there are differences between them.

There are some innovative programs under discussion and in the early stages of implementation that may test some of these long-standing rules and norms of the industry. This is likely to result in re-thinking some of these old standards. If a new idea for a program lands on your desk, we've provided some analytical tools in this white paper that may be helpful to you as you grapple to determine whether such a program fits within the regulatory framework. The biggest challenge is the lack of specific guidance in many states.

Download our free white paper to learn more.

Rebate, Gift, or Inducement – What Does It Matter?

No doubt everyone likes to get something extra, something for free, or a little treat now and then, right? Who doesn't like a good BOGO (buy one, get one) sale? Or that added incentive to buy big: purchase a $100 gift card, get a $25 gift card for free. Score! No big deal, right?

But if we’re talking about gifts in connection with the sale of insurance or annuity products, it IS a big deal, and one that can land you in hot water with state insurance regulators. Most insurance departments have published regulations that limit what, if anything, an insurance agent or carrier can give to prospective or existing clients as a gift. Some states have what I call a “zero tolerance” for gifts of any kind that are offered as a means to induce a consumer to purchase an insurance product. In these states, their rules generally state that gifts “of any valuable consideration or inducement not specified in the policy” are prohibited.

Other states have similar wording in their regulations, but they still allow gifts up to a certain limit to be provided, with amounts generally in the $5-50 range per consumer, per year. There are outliers, though. For example, the state of Idaho includes this same wording in their regulations, yet has the highest limit of $200 per person, per year. It’s also important to note that some of the states that do allow certain gifts not only have a monetary limit, but only allow the gifts to be given if they are unrelated to and not dependent on the purchase of insurance.

Whether you call it a rebate, a gift, or an inducement, the basic premise of the rule is the same – state insurance regulators want clients on even footing when it comes to the policies they purchase. To pass the rebate test in most states, any benefit must be expressly stated in the insurance or annuity policy, and provided to everyone who purchases the product. This also helps to ensure that consumers are not influenced to purchase a product primarily because of the gift, and that they have a real need for the product itself.

According to the NAIC Unfair Trade Practices model regulations (Model Reg 880-4(H)(1)), “Paying, allowing, giving or offering any of the following, if not specified in the contract, is an unfair method of competition and an unfair or deceptive act:

Rebates of premiums payable on the policy; special favors or advantages in the dividends or other benefits; any valuable consideration or inducement not specified in the policy; giving, selling, purchasing or offering, as an inducement, any stocks, bonds or other securities, any dividends or profits accrued, or anything of value not specified in the policy.”

So, what does this mean, especially for insurance agents? What exactly is a rebate? In some states, a rebate means a gift of value, such as cash, a gift card, a fruit basket, or some other tangible gift or object. Other states, however, may consider it a rebate if an agent holds an insurance seminar and serves a nice meal. The cost of that meal, per person, may need to comply with the states’ rebating limits, or the agent runs the risk of a state enforcement action for violating state laws. The same issue may apply with a client appreciation event, such as wine tasting party, golf outing, or other similar events. To determine if the event is in line with their rules, many states will calculate the cost of the event, including all possible variables, such as food, drink, cost of entertainment, etc., and divide it by the number of attendees.

Insurance companies and agents often conduct business in multiple states, so being familiar with and staying current with each states’ position on rebates is important. Let us do the work for you. Enroll today!

Rebating, Gifting, and Inducements training helps compliance professionals make sense of a gray area.

I’m focusing here on the benefits of training for a specific compliance topic: rebates, gifts, and inducements. Why? Because it’s one of the hardest areas for compliance professionals to get their hands around, especially with any consistency or certainty. (Click here to read more about what training can do for compliance professionals and compliance functions.)

If you’ve spent even a short time working in insurance compliance, then you’ve probably answered the question of “Can we do this?” with “It depends…” This is probably even more true if you’re fielding questions about sales inducements.

While rebating is illegal in most states, there is much less consistency around the threshold of when something becomes a rebate, or how much money can be spent before exceeding limitations.

So, what can a discerning compliance professional do?

  1. Training and education. Learn what rebating is, how it can come up and why it’s problematic. But that’s not all, since it’s not possible to memorize each state’s various rules, what would serve you better is learning a framework to help you evaluate sales inducements. It won’t always mean a quick and easy answer, but having a process gives you clear markers of what to consider and think through before you can make a judgment call if something is allowable or not.
  2. Research Surveys. You can compile information about each state, or you can purchase a research survey. Here’s a sample of ours. A couple things to note there. First, researching each state’s rules and regulations is time consuming. The information can be found in various places that takes time to uncover and collect. Second, you’ll need to understand how often the information is updated. If you’re taking the DIY approach, what’s your process for ensuring it’s up to date? If you’ve found information or purchased a research survey, how often is it being updated? If you’re curious, our research survey is actively maintained, and those who have purchased it receive e-mail notification each time we record an update.

If you’re interested in learning more about rebates, gifting, and inducements, take a look at our Webinar replay on our education and training webpage.