Nationwide Life Insurance Co. and Nationwide Life and Annuity Insurance Co. have settled claims with five state insurance regulators regarding unsuitable variable annuity sales to clients of a Kansas-based financial advisory firm.

The five states – California, Kansas, Missouri, Minnesota and Wisconsin – will share the $2.1 million settlement, according to a statement from the Minnesota Department of Commerce.

The case stems from Waddell & Reed’s use of products developed by Nationwide Life and the surrendering of 6,742 United Investors Life Insurance Co. (UILIC) policies, worth about $616 million. Customers who surrendered the policies incurred surrender charges, totaling more than $9.6 million, and were allegedly at the risk of recovering a lower death benefit during the term of the annuity, according to Minnesota officials.

Waddell & Reed advisors allegedly recommended variable annuity exchanges without having reasonable grounds for believing that the recommendations were suitable for their customers, the statement said.

A significant number of policies were allegedly replaced for reasons that benefited the financial advisor, not the customer, according to Minnesota officials.

In 2000, Waddell & Reed asked Nationwide Life and Nationwide Life and Annuity to develop two variable annuity products for its clients. The resulting two new products – the Waddell & Reed Advisors Select Plus Annuity and the Waddell & Reed Select Annuity – began being sold to clients in January 2001. At the firm’s recommendation, many of the firm’s clients purchased the new annuities to replace the variable annuity policies from UILIC they held in their portfolios, according to the Minnesota statement.

Though the violations outlined in the settlement pertain to the sale of Nationwide Life annuities by Waddell & Reed, regulators from the five states assert that Nationwide Life and Nationwide Life and Annuity did not take the required steps to ensure that Waddell’s supervision and control were adequate.

In entering into this settlement, Nationwide Life does not admit to the allegations made by regulators that it violated any law or regulation, officials said.