CHAPTER TWO - MARKETING

 

MISREPRESENTATION

Misrepresentation during sale of insurance and the penalties as a result of misrepresentation is of concern when marketing any insurance product, and it is of particular importance when marketing annuities.  California regulations are quite complete and precise in this regard, and must be discussed prior to the study of annuity marketing.  The California regulations governing this subject are essentially as follows:

1. An insurer or officer or agent thereof, or an insurance broker or solicitor shall not cause or permit to be issued, circulated or used, any misrepresentation of the following:

(a) The terms of a policy issued by the insurer or sought to be negotiated by the person making or permitting the misrepresentation;

(b) The benefits or privileges promised thereunder;

(c) The future dividends, payable thereunder.²

1. A person shall not make any misrepresentation (a) to any other person for the purpose of inducing, or tending to induce, such other person either to take out a policy of insurance, or to refuse to accept a policy issued upon an application therefore and instead take out any policy in another insurer, or (b) to a policyholder in any insurer for the purpose of inducing lapse, forfeit or surrender his insurance or tending to induce him to therein.
2. A person or insurer shall not make any representation or comparison of policies to an insured which is misleading, for the purposes of inducing or tending to induce him to lapse, forfeit, or surrender his insurance, whether on a temporary or permanent plan.³   
3. Any person violating these provisions is guilty of a misdemeanor and punishable by a fine not exceeding one thousand five hundred dollars ($1,500) or by imprisonment not exceeding six months. ³
4. Whenever any insurance agent, broker, or solicitor knowingly violates any of these provisions, the Commissioner, after a hearing may suspend the license of any such person for a period not exceeding three years.⁵ 
5. If an insurer knowingly violates any of these provisions, or knowingly permits any officer, agent, or employee to do so, the Commissioner, after a hearing may suspend the insurer's certificate of authority to do the class of insurance in respect which the violation occurred.⁶
6. Any person may be compelled to testify and produce books and writings at the trial or hearing of any person charged with violating these provisions even though such testimony or evidence may incriminate him.  A person shall not be prosecuted for any act concerning which he is compelled so to testify or produce evidence, except for perjury committed in so testifying.⁵   

 

PROVIDING ANNUITIES TO THE SENIOR MARKET

With the continual improvement in mortality, primarily due to advances in the medical field , the “senior” market continues to grow as a percentage of the population.  People are living longer and they constitute a very important and financially influential portion of our society.  When one looks at the results of the survey (discussed previously) it is apparent that there are two annuity markets by age—under age 65 and age 65 and older.  The type of annuity—deferred or immediate, fixed or variable—varies by age category, as does the anticipated use of annuities for the younger group, and the actual primary use of annuities in retirements. 

Obviously, the California seniors have special needs and problems and when insurance and annuities are involved, the right decisions for each of them are extremely important and in they are often in no position to recover financially from a bad decision.  Since insurance agents and others in fiduciary relationships with citizens may have the ability to influence the financial decisions that must be made by them, California has enacted insurance regulations and other laws to protect the seniors.  It is the duty of every person who markets any financial and/or insurance product to the elderly to not only act in the best interests of the consumer and seniors in particular, but to also be well acquainted with those regulations that penalize those who do not. 

It should be noted that much of this text pertains to the taxation of annuities and annuity payments.  Taxation must be considered from the first day of the accumulation stage, through the distribution of payments and since most distributions are made to those who have retired or are nearly at retirement age, special attention has been paid to providing an understanding of the tax laws and how they affect the senior population.

One of the major concerns of the elderly is that of outliving their resources.  Annuities solve this problem perfectly.  Since the return on the “investment” of an annuity is guaranteed by the assets of the insurance companies, it is nearly impossible for an annuity to provide the income that other investment vehicles can during upswings in the market.  People have a tendency to forget the stock market losses and remember the high stock market gains.  Therefore, there appears to be a “need” to inform and educate the elderly investor of the advantages and disadvantages of investing in annuities

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SPECIAL SENIOR DIFFICULTIES

The most critical problem seniors may have is short-term memory loss is typical as one grows older.  Therefore this important part of our society must have special protection against those who would take advantage of these conditions suffered by our seniors.  In California, Civil Codes⁶ and  Insurance Codes, addresses the marketing of insurance and other financial (and non-financial) products to the elder citizens.

The effect of short-term memory loss (not dementia) can cause a senior to not fully understand a complicated contract—such as an annuity or insurance contract.  While a person without understanding has no power to make a contract of any kind, however, the person is still liable for the reasonable value of things furnished to the person necessary for the support of the person or his/her family.⁷

A contract or other conveyance of a person of “unsound mind” but with some understanding that was made prior to the incapacity of the person as determined by the courts, is subject to rescission.   Further there will be a rebuttable presumption that affects the burden of proof  that a person is of unsound mind if they are substantially unable to manage his/her own financial resources, and also be able to “resist fraud or undue influence.”  Substantial inability cannot be proven only by an isolated incident of negligence or “improvidence.”⁸ 

After his/her incapacity has been officially determined by the appropriate Probate Court and/or Welfare and Institutions Court, a person of unsound mind may make no conveyance or other contract, delegate power or waive any right, until they have been fully restored “to capacity.”⁹    

Further, the establishment of a conservatorship (under the proper Probate Code) must be determined by the courts of the incapacity of the “conservatee.” 

The Code provides that a person of unsound mind, regardless of what degree, is still civilly liable for a wrong that they commit, but is not liable in exemplary damages unless at the time of the act, the person was incapable of knowing that the act was wrongful.¹⁰  

 

SHORT TERM MEMORY LOSS INDICATORS

“Cognitive impairments,” or short-term memory loss, is rather difficult to ascertain unless one plays particular attention and is aware of how this situation manifests itself.  More often than not, seniors have problems with forgetting things that they never used to forget, they may find themselves having to wear a hearing aid, and the greatest majority of seniors must wear glasses – which they may have changed once in a while when they just can’t see any longer.

It is so very, very important that an agent be aware of any impairments, physical or cognitive, so that they are comfortable that the senior can make a reasoned and informed decision. 

The first rule is that not all elderly are impaired.  The second rule is that the older you get, the more you forget.  The ability to make an informed decision can be reduced by hearing or eyesight difficulties, although today they have remarkable appliances and glasses to help.  One should watch for mobility problems but this may or may not signify any lack of understanding – just because a person uses a walker is no sign that their brain is “in park.”

Cognitive impairments are difficult to detect, but one of the ways that it may be spotted is to listen to the person talk which may give a clue as to how their brain works, and if they understand what is being said.  Step two is to review the process during and at the end of the interview, to see if anything out of the ordinary slipped through the cracks—one could not expect that anyone could remember all of the information provided to them in these situations, but they should at least basically understand what is happening.  Remember, according to the California Code¹¹ a contract with a person of unsound mind which is made before the capacity is determined by a court, is subject to rescission and if the person is completely without understanding the contract is void.

If it is apparent that the client has difficulty in performing normal everyday tasks, or is unable to express himself or understand simple concepts, then there is a problem.  Of course, if a person has “mood swings” and forgets appointments and misplaces important items, then these would be indications of cognitive impairments, but rarely will an agent be with an individual enough to notice these aberrations of normal activity.

 

CLIENT SUITABILITY

Selling annuities to a senior is a financial product sale, and an effort must be made to make sure that the client and product suit each other.  It is extremely important that detailed financial records be kept of all transaction with the seniors as typically some of the material discussed will be forgotten otherwise.  And before financial discussions can be meaningful, it is necessary for the senior client to have detailed financial records of his assets and liabilities.

The tax situation of the client is important as that is one of the most important benefits of an annuity.  However, if the client really has little or no income tax liability and none is anticipated, then serious consideration must be given as to whether (a) this is the proper product for the client, and (b) if the client can afford the financial strain of investing in an annuity.

In the same vein, since annuities are not designed to be effective short-term investments, if the client does not have sufficient liquidity to maintain a decent life style after purchasing an annuity, then probably an annuity is not suitable.  If it appears that the client may need or want the funds that are invested in the annuity in the near future, then other types of investments or products should be used, not an annuity.  The surrender charges and taxation penalties for short-term investing in annuities must be fully explained so that the client understands that if he purchases the annuity for short-term needs, it can be quite costly.

In discussing financial needs, the client may have some investments already in a 401(k) or 403(b) plans, Keogh plans or some other such retirement plan, unless he has already distributed these funds because of age.  If the client still qualified for any of these plans that offer favorable tax benefits, then that is where his money should go at this time.  If, on the other hand, an annuity is purchased for the purpose of funding a 401(k) or similar account, then the tax benefits of an annuity is unnecessary and the annuity should be used in a tax-qualified account only in those situations where the tax–deferral is important.

If a senior is thinking of buying a Variable Annuity, then one must look at the investment sophistication of the client as this is a rather complex product.  Sometimes the concept of variable subaccounts is beyond the contemplation of the senior.  Unless the client is so wealthy that he would not notice how the market fared because the money was immaterial, then an agent is not performing a professional service if the client does not fully understand how the plan works.

If the client cannot understand fully the ramifications of the annuity purchase, there will not be the type of situation that makes for a happy relationship.  If the client does not provide enough information so that a proper determination as to the suitability of the product can be made, then that is also not a good situation.  If the client makes a decision that is against the recommendation of the agent or insurer’s recommendations, the consequences of such an action must be fully understood by the client – but it is his decision to make and a professional will provide as much assistance as possible so that his decision would not cause too much damage, if any.

If these recommendations are suitable, the insurer (and the agent) must maintain adequate records so that in the future at any time, after the fact, it can be determined if the recommendations were suitable for that client.

Estate Planning

Annuities are an integral part of a proper estate plan.  The transferring of assets to designated recipients at death is a profession practiced by attorneys, accountants and insurance professionals.  Until recently, many thought that estate planning was only for those with huge estates.  The Economic Growth and Tax Relief Reconciliation Act of 2001 changed all that, exempting estates of $1,000,000 in 2001, increasing each year until it soon reaches zero.  Gift taxes are also an important part of an estate plan, and these taxes have been reduced in some areas. 

 

There are two things to remember.  First, the way the law is written, it will “sunset” in 2011 unless legislation keeps it alive.  Secondly, there are many other items other than taxes that are reasons for estate planning – probate, wills, trusts, etc. – that still exist.  Therefore, annuities will still play a big role in estate planning and estate planning is still alive and well.

 

AGENT’S ADVICE AT TIME OF SALE OF ANNUITY TO SENIORS

Regulations in respect to sales of annuities to Seniors states that if an agent offers to sell an “elder” any life insurance or annuity product, the agent must advise the elder or the elder’s agent that the sale or liquidation of any stock, bond, IRA, Certificate of deposit, mutual fund, annuity, or other asset to fund the purchase of this product may have tax consequences, early withdrawal penalties, or other costs or penalties as a result of the sale or liquidation.  Further, the agent must advise his client that he/she or elder’s agent, may want to consult an independent legal or financial advisor before selling any assets or before selling or liquidating any annuity product being sold, offered for sale or even being solicited.¹²

 

POLICY DETAILS AND NOTIFICATION FOR SENIOR CITIZEN ANNUITIES

The regulations require that every annuity that is sold, delivered or issued for delivery to a Senior Citizen (over age 60) must have a notice which (plainly) states that after he has received the annuity it may be returned to the insurer for cancellation simply by mailing or delivering it to the company or to the agent from whom it was purchased.  The annuity owner may return the annuity within 30 days by mail or otherwise during this period.  For a Variable Annuity (as stated elsewhere in this text), the premium may be invested only in fixed-income investments and money-market funds, unless the investor specifically directs that the premium be invested in the mutual funds underlying the Variable Annuity contract.  

If the Variable Annuity is returned within the 30-day cancellation period and if the owner has not directed that the premium for Variable Annuity contracts be invested in the mutual funds underlying the contract during the cancellation period, then this will have the effect of voiding the policy – which means that the parties shall be in the same position as if there had been no policy issued and all premiums paid and any policy fee paid for the policy shall be refunded by the insurer to the owner within 30 days from the date that the insurer is notified that the owner has canceled the policy.

Conversely, if the owner of a Variable Annuity has directed that the premium be invested in the mutual funds underlying the contract during the 30-day cancellation period, then cancellation shall entitle the owner to a refund of the account value which will be refunded within 30 days from the date that the insurer is notified that the owner has canceled the contract.

Further, every individual annuity contract, other than variable contracts and modified guaranteed contracts that are subject to this particular regulation(s), that is delivered or issued for delivery California state shall have the following notice either printed on the cover page or policy jacket in 12-point bold print with one inch of space on all sides or printed on a sticker that is affixed to the cover page or policy jacket:

 

The phrase "after 30 days, cancellation may result in a substantial penalty, known as a surrender charge" may be deleted if the policy does not contain those charges or penalties.

In addition, every individual Variable Annuity contract, variable life insurance contract, or modified guaranteed contract subject to this regulation, that is delivered or issued for delivery in this state, shall have the following notice either printed on the cover page or policy jacket in 12-point bold print with one inch of space on all sides or printed on a sticker that is affixed to the cover page or policy jacket:

The words "known as a surrender charge" may be deleted if the contract does not contain those charges.

Excluded from this provision are credit life insurance policies, some forms of group life insurance , and noncontributory employer group annuity contracts.  (There are additional requirements for group life insurance sold to a Senior.)

 

ILLUSTRATIONS OF NON-GUARANTEED VALUES

When non-preprinted illustrations of non-guaranteed values on annuity contracts that are delivered or issued for delivery to senior citizens, shall disclose on those sheets, in bold or underlined capitalized print, or in the form of a contrasting color sticker, bright highlighter pen, or in any manner that makes it more prominent than the surrounding material, with at least one-half inch space on all four sides, the following statement:

All preprinted illustrations containing nonguaranteed values must show the columns of guaranteed values in bold print.  All other columns used in the illustration shall be in standard print. "Values" are defined as including cash value, surrender value, and death benefit.¹³

 

ANNUAL STATEMENT

Whenever an insurer provides an annual statement to a senior policyowner of an individual annuity contract issued after January 1, 1995, the insurer must also provide the current accumulation value and the current cash surrender value.¹⁴   

 

MARKETING BY SEMINARS

The “seminar” approach to selling is common in areas where there are a large number of retirees in particular, and they receive numerous invitations by mail (some very elaborate) or telephone to attend an “educational seminar,” often at one of the trendiest luncheon spots in the city, for the purpose of discussing “estate planning,” “investment strategy” or “Long Term Care Planning” or such.  The speakers may be professionals in their field and include attorneys specializing in elder law, tax accountants or attorneys specializing in taxation, but in every case someone is trying to sell something (somebody has to pay for the meal or hall rental).  The problem generally is that the person who is selling something often misrepresents him (or her) –self as an “expert” in the field, and/or they do not advertise that the sole purpose of the “seminar” is to sell insurance or annuities (or mutual funds, etc.). 

This can be a violation of the insurance code on untrue, deceptive or misleading advertisements as no advertisement (even an engraved personalized invitation is still an “advertisement) for an event where insurance products will be offered for sale, may use the terms “Seminar,” “Class,” “Informational Meeting,” or similar term to characterize the purpose of the event unless it adds the words, “and insurance sales presentation” immediately following those terms in the same type size, etc.  Such meetings are obviously not illegal per se, unless they are used to sell insurance products without prior notification.¹⁵

 

WAIVERS OF SURRENDER CHARGES

Surrender charges has been discussed and is a problem with those who purchased an annuity and for-whatever-reason finds that they need to take the money out of the annuity.  Until recently, the only way an annuity owner could take out the money without paying a penalty - often substantial – was at death and at annuitization.  Now, however, surrender charges are waived on most annuity policies if the owner is confined to a nursing home. 

Some policies go a little further and will also allow surrender without penalty in cases of terminal illness or hospital confinement’s disability, even “disaster” in some annuities (often referred to as “crisis waivers).

The waiver of surrender charges may be accomplished either by waiver or by rider.  The distinctions between “waiver” and “rider” are often blurred, but basically the waiver is the voluntary relinquishment of a legal right, and a rider is an attachment or endorsement to a policy that modifies clauses or provisions of a policy.¹⁶  Even when used interchangeably, usually the waiver is instigated by the insurance company and often no extra charge is accessed against the policyholder, whereas a rider is instigated by the insured and there often is an added charge. 

 

LIVING TRUST MILLS

For purposes of this discussion, a “Living Trust Mill (LTM)” is an unlawful marketing scheme used to sell annuities to senior citizens.  While there are several types of LTMs, they are all are created by misrepresentation of identity and purpose as each “mill” misrepresents the actual business of the sales representative and hides the true purpose of the solicitation.  Often the first approach to seniors is the “seminar” approach, but instead of presenting the product of service that they advertise, the meeting is supposedly designed to educate those attending about the benefit of living trusts (and other estate planning devices).  Seniors are invited through mass mailing, telemarketing, or any other method to “get the word out” including informal announcements at senior functions.¹⁷

Once the crowd has gathered, the salespeople misrepresent themselves as experts in financial and/or estate planning.  Their services are either very inexpensive or “free” as a public service, but in any event, the goal is to get the trust of the seniors and they find out the assets of the seniors by determining whether the senior could benefit from a living trust. 

Persons so engaged in these “mills” may be licensed or unlicensed insurance persons and they may work in conjunction with attorneys, thereby giving a “legalistic” atmosphere to the meeting.  After the living trust and other estate planning documents have been sold, then a licensed agent – who in most cases does not represent himself/herself to be an “insurance agent” – tries to sell the senior on the benefits of an annuity as part of the estate planning process.  Individuals  will often consider the agent as their legal advisor or estate planner and not an insurance agent.

Besides being actionable under the Business and Professional Code¹⁸, such violations are administratively actionable under the Insurance Information and Privacy Protection Act and may result in cease and desist orders, financial penalties and suspension or revocation of certificates of authority and/or insurance licenses.¹⁹

 

PRETEXT INTERVIEW

The Code states that “no insurance institution, agent or insurance support organization” (defined as persons engaged in business of collecting information about persons for the primary purpose of providing the information to an insurance institute or agent for an insurance transaction…) shall perform a pretext interview.²⁰ 

“Pretext interview” is defined as an “interview whereby a person, in an attempt to obtain information about a natural person, performs one or more of the following acts:

1. Pretends to be someone he or she is not.
2. Pretends to represent a person he or she is not in fact representing,
3. Misrepresents the true purpose of the interview.
4. Refuses to identify him or her upon request.

The first three of the above “acts” are typical and common in a trust mill so any agent or insurance company that uses or authorizes the use of these practices, will be sanctioned under the Insurance Information and Privacy Protection Act.

Further, the Commissioner has requested that all agents and insurers review their marketing programs to determine if they are involved with such an operation, with particular attention to any program for annuity sales in which the insurance agent or insurer states or infers that they have particular expertise in the areas of law, finance or financial planning.  The Commissioner instructs that such programs should be corrected immediately and remedial action taken, including allowing purchasers that were so unlawfully solicited, to rescind their contracts.

 

CONTACT FROM LEADS

Contacting a senior citizen for the purpose of selling insurance or annuities as the result of a “lead system” is not illegal as such, provided that there is no misrepresentation.  Any such advertisement or any other lead method that is directed towards those age 65 or older, shall prominently disclose that an agent may contact the applicant (if that is the case).  And further, the agent who contacts that person as a result of the lead MUST disclose that fact to the prospective purchaser during the initial contact.²¹

It is also illegal for an agent or broker or solicitor, etc., to solicit a person age 65 or older for the purpose of marketing annuities (or life insurance or disability insurance) by using a business name, whether true or fictitious, which is deceptive or misleading in respect to the status, character, or proprietary representative capacity of the entity or person, (and here is the “kicker:”) or to the true purpose of the advertisement.²²  This portion of the insurance code also defines an advertisement as envelopes, stationery, business cards, or other materials designed to encourage…(an) annuity.  For instance, the business card or other price quotes or advertisements must contain the agent’s license number and word “Insurance.”²³

MISLEADING MATERIALS

“Misleading” materials are specified advertisements that insinuates that the materials are from or associated or affiliated with a governmental agency or nonprofit or charitable organization or a senior organization.  No advertisement can infer or imply that the party can lose a right or privilege or public benefits if they do not respond to the advertisement.  To help enforce these regulations, all advertisements by agents or producers, etc., must have the approval of the insurer.

There are certain prohibitions that apply to any advertising directed at the age 65 and older market. Pursuant to these prohibitions, an advertiser may not engage in any of the following in its advertising:

1. An insurer may not use a name that is misleading or deceptive with respect to the status, character or capacity of the person or concerning the true purpose of the advertisement (e.g., “Tax Advisor, etc.);
2. An advertisement must not use words, letters, initials, symbols, or other devices that are so similar to those used by governmental agencies, nonprofit or charitable institutions, senior organizations, or other insurers that they could have the tendency to mislead (e.g., “Veterans Association Consultants; etc.);
3. An advertisement must not use the name of a state or political subdivision (city, county, etc.) in the name of a policy or in its description (e.g., Marin County Advisors);
4. An advertisement must not use any slogan, name, symbol, service mark or other device in any way that implies that the insurer, its products or its agents who may call upon the consumer in response to the advertisement are connected with a government agency, such as Social Security (e.g., Social Security Benefits Consultants, etc.);
5. An advertisement may not imply that the reader will lose any rights, privileges, or benefits, etc. under the law by failing to respond to the advertisement (e.g., “You may lose these benefits with the next session of Congress…”).

Also, in case of a Seminar, etc, “and insurance presentation” must follow the terms of seminars, etc.

In addition to the above requirements, agents and insurers may not

1. use an address for the purpose of misleading or deceiving others as to the true identity, location or licensing status of the insurance company or its agents;
2. use language in the name of the insurance policy or certificate that is to similar to the name of a government agency or program that it could be construed as confusing or misleading a prospective purchaser (e.g., “Consumer Information Center for Seniors); and
3. solicit a particular class through the use of advertising that states or implies that their occupational or other status entitles them to a reduction in premium, if the policies are actually being sold on an individual basis at no premium discount. 

Penalties for the violation of these regulations are, as stated elsewhere in this text but needs reiteration - $250 for the first offense, $500 for the second and $1,000 for third and later offense. Plus, there is always the possibility that the license or certificate of authority could be revoked.

 

SALES IN THE HOME OF THE ELDERLY

It should be no surprise that the majority of insurance sales to the elderly are conducted in their homes.  While the elderly prospects may feel that they are “safer” in their home, experience has shown that just the reverse may be true.  Even though they may feel safe, they are now also a “host” and as such are more inclined to make the “visitor” comfortable and often may feel much more comfortable making a decision in their home.  The elderly generation often feels that nothing bad can happen to them in their home.  Unfortunately, this has not always been the case.

So that the elderly prospects may be protected from being entirely at the mercy of such persons, the Insurance Code demands that for the sale, offering for sale, or for lead generation for the selling of annuities to senior insureds or prospective insureds by any person, certain procedures must be followed.

 

If the senior has an existing relationship with the agent and requests that the agent come to their home on the same day, a notice must be delivered to the senior’s home prior to the meeting.  The notice must be state substantially the following (in 14 pt. type):

 

Prior to contacting the senior in their home, the agent shall first, prior to asking any questions, state that the purpose of the meeting is to talk about insurance or to gather information for a follow-up visit to sell insurance (if that is the purpose).  The agent must also state

1. The names and title of all persons arriving at the senior’s home.
2. Each person attending such meeting shall provide the senior with a business card or other written identification stating the person’s name, business address, telephone number, and any insurance license number.
3. The persons attending such meeting will immediately end all discussions and leave the home of the senior after being asked to leave by the senior.
4. A person may not solicit a sales or order for the sale of an annuity or life insurance policy at the residence of a senior, in person or by telephone, by using any plan, scheme, or ruse that misrepresents the true status or mission of the contact.

 

 

JOINT ANNUITIES

There are two types of joint annuities, one providing benefits until the death of the first of two annuitants, and the other continues benefits until the death of the last annuitant.

A Joint Annuity, in effect, provides an income of a specified amount as long as the two persons named in the annuity live with benefits ceasing at the death of the first of the persons to die.  This is a relatively inexpensive way to provide annuity benefits, but it has a limited market.

Example, two “old-maid” sisters who have sufficient income to support one sister, but not both.  They could purchase a joint annuity at an amount sufficient to support one sister without disturbing the income from the other, therefore the combined income would be sufficient to support them.  Upon the death of one of the sisters, the income from the original source would be sufficient to meet the needs of the survivor.  These contracts are always sold as a single-premium immediate annuity.

This type of annuity can also be used in those situations to provide income where one of the annuitants is receiving custodial care. 

Joint-and-Last-Survivor Annuity

The joint-and-last survivor annuity is usually more appealing as it provides income as long as either of the two names persons live and is most often used for husband and wife or in families where there is a permanently disabled dependent child.

This is more costly of all annuity forms as its purpose is to “stretch out” payments until 2 persons die.  For example, using the same assumptions for pricing used previously, for an income of $100 per month to a married couple both age 65, there would have to be an accumulation of approximately $18,000.  If, as more often happens, the husband is 65 and the wife is 60, then this amount climbs to $19,500.  Compare these to the $12,000 required to provide a life income of $100 a month to a man (only) age 65.

The joint-and-last-survivor annuity can be purchased as a single premium immediate annuity (which be more costly than the above assumed premiums) or it may be an option under an annual premium deferred annuity.  It often is used for settlement life insurance and endowment proceeds.

Typically, an annuity does not have a refund feature but insurers generally will offer an annuity where 120 monthly installments are guaranteed, or, in some cases, 240 installments.  When both husband and wife are age 65, a life income of $100 a month with 120 guaranteed installments would require an accumulation of approximately $18,000 and change.

Another variation is the joint-and-two-thirds annuity wherein the income to the survivor will be reduced to two-thirds of the original amount—one person can live on less money than two persons (except maybe for trophy wives…)—and the accumulated amount necessary would be close to $15,000.  If this type of annuity is not available, one can accomplish the same thing by placing a single-life immediate annuity on each annuitant, and a regular joint-and-survivor annuity on both.  Therefore, an immediate annuity on each life (for example) of $100 a month and a joint-and-survivor annuity in the amount of $100 a month, will provide for $300 a month as long as both annuitants are alive, and at the death of one, $200 a month will be paid to the survivor.

Another variation is the joint-and-one-half annuity where the income to the survivor is reduced to one-half the original amount.  With the computing technology available to insurance companies presently, insurers have the ability to design a survivor benefit to any specified proportion.

Joint-and-last-survivor annuities is often used by private pension plans to pay retirement benefits to married plan participants.  Typically, if the joint-&-2/3 annuity is elected, the income is reduced only if the employee is the first to die, therefore if the spouse or other dependent dies first, the employee will receive the full income.  Note: federal laws now require written consent of the non-employee spouse if the survivorship benefits are dropped.

 

TWO-TIERED ANNUITY

A Two-tiered annuity is a type of fixed annuity wherein interest is credited to the account value at two different rates and the amount that is paid to the owner or annuitant depends on the method the value of the account is applied by the owner.  If the accumulated value is taken as a series of income payments, then the amount that would be applied to provide those payments is determined by using the highest crediting rate.  Conversely, if the value is taken as a lump sum or some other different form, then the amount of payment would be determined by using the lower interest rate.  The difference between the higher and lower rates is, as a general rule, affected by the overall interest rate used for commercial purposes, with a difference of between 20 and 100 basis points typically.

There are several forms of two-tiered annuity contracts with some comparing the higher interest rate solely to life annuity income payments.  These contracts have been criticized because there is a substantial difference between what account value is available if the annuity is surrendered rather than annuitized.  Situations exist where there is a cash surrender value 20% lower than the value that would be used for annuitization.  Theorists properly argue that the effect of this difference is to encourage individuals to take a guaranteed stream of lifetime payments, thereby using the annuity for the purpose to which it was designed—payment of an income stream.

 

MODIFIED GUARANTEED ANNUITY

A modified guaranteed annuity (MGA) is a fixed annuity in which the amount paid to the owner or annuitant is subject to a market value adjustment if the contract is surrendered before the end of an interest guaranteed period.  These contracts are also known as market value adjusted” annuities (MVAs).  The interest guarantee periods under a MGA are of varying durations, commonly between one and ten years.

Many MGAs provide a variety of guarantee periods under the same contract, thereby allowing the owner the right to allocate premiums among a range of interest-guarantee periods.  This usually works by the money allocated to a period automatically rolling over to a new guarantee period for the same period as before, but at a new rate.  The owner has the right to request a different guarantee period. 

Example:  An MGA may offer 10 (typical) guarantee periods, ranging from 1 to 10 years in duration.  At the end of the first year, the cash value that is allocable to the guarantee period, will start a new guarantee period at the rate the insurer offers for the second guarantee period.  At the end of the second year, the cash value that has been allocated to the two-year guarantee period will start a new two-year guarantee period, and the cash value allocated to the one year guarantee will begin a new one-year guarantee.  This will continue until annuitization, surrender or death of the owner. 

This option is often offered with variable deferred annuities wherein the owner can allocate a part of his premiums and cash value to the MGA investment option and receive a guaranteed rate of return and allocate the remainder to the variable investment options offered under the contract.

While there are several different market value adjustment formulas, the purpose of the MGA is to guarantee a higher interest rate for a longer period of time that would otherwise be possible.  It is designed so that it will adjust the payment that is made in the event of a surrender before the end of the guarantee period.  The adjustment is for any change in interest rates that may have occurred since the interest rate guarantee was made by the insurer and purchased assets necessary to fund the guarantee.  If, for instance, interest rates have risen, then the assets will be worth less, therefore the effect of the market value adjustment will reduce the surrender value.  Conversely, if interest rates have decreased, then the effect of the adjustment would be to increase the surrender value.

There can be the threat of a potential loss as some MVAs will reduce only interest that has been credited in excess of the stated minimum rate, while others can result is a loss of credited interest as well as some portion of the premiums paid for the annuity.  Because there is the possibility of loss, some MGAs may be registered with the SEC as securities.

Usually the market value adjustment under an MGA becomes effective if the owner surrenders the contract before the end of the guarantee period.  Some MGA terms allow for other events to start a market value adjustment, such as transferring money between one guarantee period and another guarantee period before the end of the guarantee period, partial withdrawals or annuitization before the end of a guarantee period.  MGA contracts sometimes allow withdrawals up to a certain stipulated percentage, such as for a nursing home expenses, without imposing any market value adjustment.

 

STUDY QUESTIONS

1.  Agent Bob interviewed Mr. Sam in regards to his annuity that he had with another company.  Bob showed Mr. Sam how much money he would save him if he dropped his present annuity and bought a new from Bob.  Bob did not mention the surrender fee as he felt that was the responsibility of Mr. Sam.  According to California law, this is

      A.  nothing but pure sales technique.

      B.  fraud.

      C.  misrepresentation.

      D.  simply “buyer beware.”

 

2.  One of the major concerns of the elderly where an annuity may help, is

      A.  outliving their resources.

      B.  supplementing their Medicare.

      C.  helping them afford a better home.

      D.  paying income taxes.

 

3.  One of the biggest problems that many, if not most, senior citizens have that is primarily just a function of age, is

      A.  short-term memory loss.

      B.  Alzheimer’s disease.

      C.  loss of appetite.

      D.  psychotic episodes.

 

4.  A contract with a person who had some understanding that they had purchased an annuity prior to the incapacity of the person being determined by a court is

      A.  immaterial and has no effect on the contract as he was of sound mind when he negotiated

            the contract.

      B.  subject to rescission.

      C.  fraud and criminal charges can be pressed against the agent.

      D.  terminated with no return of consideration (premium).

 

5.  One of the principal methods of determining if there is a problem with a elderly person before selling them an annuity is to

      A.  listen to them talk.

      B.  call in a psychologist.

      C.  obtain a medical statement from their family doctor.

      D.  give them rather complicated directions to a store, then ask them to repeat it.

 

6.  A client wants to purchase an annuity although he understands that he may not have sufficient liquidity to maintain his present lifestyle,

      A.  then it is his decision and the sale should proceed.

      B.  then an annuity is probably not suitable in this case.

      C.  the agent should tell the client that his tax savings should overcome the liquidity problem.

      D.  the agent should then offer to split his commission with him.

 

7.  Annuities are

      A.  are of no use in estate planning.

      B.  create tax problems in probate of an estate.

      C.  cannot be funded by or owned by a trust.

      D.  are an integral part of a proper estate plan.

 

8.  Agent Jack is talking to Marie, age 70, about how an annuity would benefit her.  Marie agrees and wants to fund the annuity by cashing in some stock and from an IRA that she can no longer maintain.  Jack must

      A.  give assistance in cashing in the stock and closing out the IRA so as to free up the cash

            so Marie can buy the annuity.

      B.  walk away and never speak to Marie about an annuity again.

      C.  advise Marie that selling stock and closing an IRA may have tax consequences and other

            penalties as a result of the liquidation, and that she may want to consult her lawyer or

            financial advisor before discussing the annuity again.

      D.  offer to introduce her to Jack’s accountant to help her with her concerns.

 

9.  Agent James is a good public speaker, so he sets up a “seminar” in a classy restaurant and sends out engraved invitations to residents of an up-scale nursing home in the area, inviting them to attend a seminar on investment strategy, representing himself as a financial consultant, and instructing them as to how they can plan for long term care—with the intent of selling them annuities.  This can be a violation of the insurance code

      A.  unless James brings in another financial consultant.

      B.  unless there is an attorney present to give free legal advice.

      C.  unless the invitation adds the words (in essence), “and insurance sales presentation.”

      D.  if James sells variable annuities as it is in violation of SEC regulations.

 

10.  When an agent wants to determine if an senior citizen has the financial means to purchase a variable annuity and whether she already has an annuity, so he represents himself as being a licensed financial consultant who wants to, principally, conduct a survey for the local Agency for Senior Concerns (which he is not) and gets an appointment with her.  This interview/sales call is

      A.  a legitimate sales appointment if he shows her his agent’s license.

      B.  a “pretext interview” and is illegal as he is pretending to be something he is not.

      C.  considered as a “preliminary” approach, and the agent can then go back a second time

            and present his sales pitch.

      D.  fraud, and is a felony with a mandatory 3 years in state prison.

 

CHAPTER TWO:

1C     2A     3A     4B     5A     6A     7D     8C     9C     10B