(Note: “Senior,” “Senior Citizen” and “Elder” are interchangeable in this discussion, and refer to individuals age 65 or over, unless otherwise noted.)
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 Medicare was introduced in 1965, no one really had any idea as to the influence it would have, besides providing health services to all persons over 65 and certain disabled persons under 65. With the growth of medical technology, the growth of the costs of medical care advanced even more rapidly. Since the older, mostly retired, citizens now have affordable health insurance, this allows them to keep more of their money to enjoy over a longer period of time.
The “senior market” for insurers is generally considered to be Medicare Supplemental policies, Long Term Care (including Home Health Care) Insurance, and Annuities. Unfortunately, the senior citizens proved to be a market for unscrupulous salespeople as this generation of seniors are usually very trusting, often uneducated in many financial matters and more importantly, quite well off. Historically, the husband was the breadwinner of that generation and handled most, if not all, of the financial matters. This created a large number of widows who were “comfortable,” some more comfortable than others and many of them with no experience in handling of financial matters.
Those who were in the insurance business in the 1970’s and 80’s, remember insurance “portfolios” consisting of several Medical Supplemental policies, often more-than-one Nursing Home or Long Term Care insurance policies, along with burial policies, small amount graded-death benefit insurance policies and “cancer” policies. When those who preyed on the elderly sold them all of the insurance that they possibly could, they turned to other ways to access more of their finances. An annuity provided another opportunity.
Annuities are not well understood by the general public, and with the introduction of Variable and Equity Indexed Annuities, voila!, the “perfect” investment product for the elderly. As indicated in this text, many annuities were designed for pre-retirement planning, therefore upon retirement it was possible that the retiree already had at least a nodding acquaintance with annuities. Since their pension plans in many cases were funded by annuities, the retiree then moved to annuitization.
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, such as Mutual Funds. People have a tendency to forget the stock market losses and remember the high stock market gains at certain times. Therefore, there seemed to be a “need” to inform and educate the elderly investor of the need to invest in annuities.
The senior citizens have special difficulties in the purchase of insurance, annuities and other financial matters. Perhaps the most critical problem they have is the simple fact that 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 Code Section 38-41 along with other Insurance Codes, assists in the marketing of insurance and other financial (and non-financial) products to the elder citizens.
A person without understanding has no power to make a contract of any kind, however, the person is liable for the reasonable value of things furnished to the person necessary for the support of the person or his/her family. (CC Code Section 38)
CC Code Section 39 is in two parts: (1) 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 has been determined by the courts, is subject to rescission. Further (2) 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.”
CC Code Section 40 , referring to the appropriate Probate Court and the Welfare and Institutions Code, states that after his/her incapacity has been officially determined by a 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.”
Further, the establishment of a conservatorship (under the proper Probate Code) must be determined by the courts of the incapacity of the “conservatee.”
CC Code Section 41 states 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.
Earlier approached in general, but specifically the financial concerns of the elderly are generally that they are afraid that they will run out of money. One of the biggest concerns in this respect is the effect of inflation. Even with today’s low inflation rate, with the low returns from investments which seems to accompany low inflation, retirees are looking backwards with fond memories of the times when they were getting 7% or more on their investments – even though inflation was higher. Social Security benefits have been adjusted to reflect inflation, and that has helped those who rely mostly upon Social Security benefits to survive.
The problem with Social Security (one of many) is that the number of employed persons that support each Social Security recipient has diminished so that the very base of the program has been weakened. Washington has made moves to move back the retirement age at which a recipient can receive full benefits – which only makes sense as people are living longer. Not politically expedient, of course, but makes sense.
As the number of elderly grows, their political clout increases – look at the recent Medicare Prescription Drug bill! Social Security will not be taken away, no matter how much some politicians (who love to scare the older population to vote in a certain way) may claim to put a lock on the Social Security lockbox.
In respect to other investments, the principal concern of senior citizens is that once they have spent their funds (they may or may not look upon it as “investing”) for retirement purposes, if something should happen to it, they will not, in most cases, be in a position to replenish the funds. One of the problems is that at a certain age (70 ½ for IRAs, for instance) they are required to take the funds out of their retirement plan, and usually the amount that they must take out (or suffer heavy tax penalties) must be equal to the required minimum distribution amount. There have been steps taken recently to reduce the amounts that are required to be released, and consideration is being given to delay the point that the distribution must begin.
One of the most recent steps, part of the 2002 tax law, the percentage of qualified plan assets that must be distributed is reduced, and the distribution age of 70 ½ can be postponed until the person retires.
Investing these funds is of primary concern to many of the elderly. Many have never had to make financial decisions before (their late husband always handled the money, etc.) so they are property concerned about assuming the risks of investing. To help them make the right decisions, and to help put their minds at ease, there are some steps that can be taken:
The elderly people are elderly – this means that there may be impairments of some sort or other that could impede their understanding of what is happening. An agent must be aware of these situations if for no other reason than the contract may be void if the applicant does not understand completely what they are signing!
“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 – even for a genius. There is actually a 75-year old tour guide at a state park who has been known to talk steadily for 2 hours during the tour, discussing the flora and the fauna and the history of the place, without an error or missing a beat – and forget to bring his lunch. Happens.
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. A professional always gets the applicant to talking, as that way he may have a clue as to how their brain works, and if they are understanding what is being said. Step two in this process, 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 Code88 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.
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 details 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 of 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 it could be entirely possible that 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 will probably 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, in particular. 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.
Besides the financial concerns of the seniors but closely tied to financial matters, is the health concerns of this important segment of our society. Indeed, anyone who has spent any time with a number of senior citizens will rapidly realize that not only is their health of their primary concern, but it overshadows any other concern for most seniors. Medicare was introduced in 1965, basically because the insurance industry was not able or did not care to, insure citizenry as they became older so the government had to do it. This still applies presently in respect to prescription drugs – both a health and a financial concern.
Many annuities are sold as a result of the efforts of agents who specialize in the Senior market and who market Social Security Supplemental policies and Long Term Care insurance. Medicare is the provider of health care for nearly all senior citizens, and to the surprise of many, it serves its purpose rather well, with frequent adjustments and tweaks, etc., but at a cost that would have not been believed when it was introduced. Regardless, it is here and it will stay.
Medicare provides hospital and doctors medical care, with deductibles and coinsurance applicable, some of which can be covered by Medicare Supplemental insurance. A wise – and most seniors are wise in this matter – will make sure that the doctors and hospitals will accept Medicare and their Medicare Supplement as payment in full for their services.
There are some medical conditions that are not covered by Medicare and if these situations arise, the medical bills can be enormous. Generally, these uncovered medical bills would be for certain plastic surgery which is performed for physical enhancement, certain medical procedures which are either experimental or are not approved by Medicare because a suitable alternate procedure is available. Incidentally, many seniors are not aware that if Medicare does not pay for a medical procedure or cost, then their Medicare Supplemental policy will not cover it also.
Another point not understood by man seniors, is that nursing home care is not covered by Medicare for custodial care. This is an area in which more seniors should be concerned, but unfortunately so many of them have the attitude that the “government will take care of them” if they become incapacitated or have to go to a nursing home. Medicare provides some care but not for custodial care, and only for a limited period.
Long-term care is normally custodial care because an individual cannot perform certain “Activities of Daily Living (ADLs) such as bathing, dressing, eating toileting, continence, and transferring. There are Long Term Care Insurance (LTCI) policies available that will provide help for ADLs either in a nursing home, assisted living facility or home health care. The possibilities of a senior citizen needing long term care is substantial, and outside the purview of this discussion, but suffice it to say, very few senior citizens are aware of the possibilities until a family member or a close friend has to go to a nursing home.
Custodial care is not cheap – indeed it is quite expensive. The majority of the persons in the nursing home are Medicare patients. Since they are Medicare (Medi-Cal in California) patients, they must pay their own way if they have the assets, or otherwise be subject to only the basic income as described elsewhere in this text. Otherwise, a decent nursing home near any metropolitan area will run $200 a day and upwards.
There have been ways to “beat the system” introduced so that a person can receive long term care paid for by Medi-Cal and they would still be able to keep all of their assets, and one of the ways this has been attempted is by using annuities – covered in detail later in this text as this is not allowed.
Why do not more seniors purchase LTCI? Interestingly, even though more people have become aware of this coverage since it is now sold on a group basis and many purchasers are younger, the sales of LTCI has fallen rather drastically. Therefore the studies that show why people do not buy LTCI from 2000 surveys, which indicated that the cost was considered as too high by the greatest majority (85%), confusing to 45%, or they wanted a better policy, or they felt that the services would not be needed – are immaterial today. Many LTCI experts now agree that the “government will take care of me” attitude is the most prevalent, even though it has not been expressed so much.
It is fair to say that when working with seniors, any agent should make sure that their client is at least aware of the availability of LTCI. There has been at least two successful lawsuits where heirs have sued an insurance company because the agent (accountant in one case) did not make the client aware of this coverage. Therefore, when the principle was confined to a nursing home and which then proceeded to spend most of their inheritance, they did not like that, and sued – and won. This is a good reason to make the client aware of the Long Term Care Rider on an annuity. Some financial planners are looking seriously at this as a more reasonable replacement for the LTCI policy that never was bought.
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 - $1 million or more and then were surprised when the heirs discovered that the family home and business was at ¾ of that amount and they had to pay a debilitating tax to the federal and state governments. The Economic Growth and Tax Relief Reconciliation Act of 2001 changed all that, exempting estates of $1 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, however, 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, thank you!
Regulations54 in respect to sales of annuities to Seniors states that if an (life ) 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.
As discussed later in this text, a more detailed discussion of selling a financial product on the basis of the product’s treatment under the Med-Cal program as it may pertain to the determination of the elder’s eligibility for any program of public assistance. Basically, an agent is prohibited from negligently misrepresenting the treatment of any asset under the Medi-Cal rules.
The California Insurance Code55 has detailed and strict instructions in respect to the annuity product that is being sold after July 2004 to Seniors in the state. All policies of the type detailed in this Section that are in force as of January 1, 2003, will be considered to be in compliance with this Section.
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:
"IMPORTANT
YOU HAVE PURCHASED A LIFE INSURANCE POLICY OR ANNUITY CONTRACT. CAREFULLY REVIEW IT FOR LIMITATIONS.
THIS POLICY MAY BE RETURNED WITHIN 30 DAYS FROM THE DATE YOU RECEIVED IT FOR A FULL REFUND BY RETURNING IT TO THE INSURANCE COMPANY OR AGENT WHO SOLD YOU THIS POLICY.
AFTER 30 DAYS, CANCELLATION MAY RESULT IN A SUBSTANTIAL PENALTY, KNOWN AS A SURRENDER CHARGE."
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:
"IMPORTANT
YOU HAVE PURCHASED A VARIABLE ANNUITY CONTRACT (VARIABLE LIFE INSURANCE CONTRACT, OR MODIFIED GUARANTEED CONTRACT). CAREFULLY REVIEW IT FOR LIMITATIONS.
THIS POLICY MAY BE RETURNED WITHIN 30 DAYS FROM THE DATE YOU RECEIVED IT. DURING THAT 30-DAY PERIOD, YOUR MONEY WILL BE PLACED IN A FIXED ACCOUNT OR MONEY-MARKET FUND, UNLESS YOU DIRECT THAT THE PREMIUM BE INVESTED IN A STOCK OR BOND PORTFOLIO UNDERLYING THE CONTRACT DURING THE 30-DAY PERIOD. IF YOU DO NOT DIRECT THAT THE PREMIUM BE INVESTED IN A STOCK OR BOND PORTFOLIO, AND IF YOU RETURN THE POLICY WITHIN THE 30-DAY PERIOD, YOU WILL BE ENTITLED TO A REFUND OF THE PREMIUM AND POLICY FEES. IF YOU DIRECT THAT THE PREMIUM BE INVESTED IN A STOCK OR BOND PORTFOLIO DURING THE 30-DAY PERIOD, AND IF YOU RETURN THE POLICY DURING THAT PERIOD, YOU WILL BE ENTITLED TO A REFUND OF THE POLICY'S ACCOUNT VALUE ON THE DAY THE POLICY IS RECEIVED BY THE INSURANCE COMPANY OR AGENT WHO SOLD YOU THIS POLICY, WHICH COULD BE LESS THAN THE PREMIUM YOU PAID FOR THE POLICY. A RETURN OF THE POLICY AFTER 30 DAYS MAY RESULT IN A SUBSTANTIAL PENALTY, KNOWN AS A SURRENDER CHARGE."
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.)
When non-preprinted illustrations of non-guaranteed values on annuity contracts that are delivered or issued for delivery to senior citizens after 1/1/95, 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:
"THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, OR VALUES THAT ARE SET FORTH IN THE ILLUSTRATION ARE NOT GUARANTEED, EXCEPT FOR THOSE ITEMS CLEARLY LABELED AS GUARANTEED."
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.56
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.57
The “seminar” approach to selling is addressed in this discussion of marketing annuities, as if one lives in a retirement community and if they are over age 55, they will be deluged with invitations 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.
So, what is wrong with this? Sometimes, not a thing. 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 code58 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.
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, of course, 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 confinements 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.59 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.
For purposes of this discussion, a “Living Trust Mill (LTM)” is an unlawful marketing scheme used to sell annuities to senior citizens.60 While there actually 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, as discussed above, 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.
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. Actually, clients often will consider the agent as their legal advisor or estate planner and not an insurance agent.
Besides being actionable under the Business and Professional Code61 , such violations are administratively actionable under the Insurance Information and Privacy Protection Act61A (CIC Section 791 and sequential portions) and may result in cease and desist orders, financial penalties and suspension or revocation of certificates of authority and/or insurance licenses.
The Code62 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.
“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:
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.
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, of course. 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.63
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.63(A) This portion of the insurance code also defines as 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.” 63B
Defined as “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:
In addition, as described earlier, an advertisement used by an agent must have been approved by the insurance company. 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
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. In addition, there is always the possibility that the license or certificate of authority could be lifted.
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.
FAny person who meets with a senior in the senior’s home for these purposes must deliver a notice in writing to the senior no less than 24 hours prior to that person’s individual meeting with the senior.
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):
During the visit or a follow-up visit, you will be given a sales presentation on life insurance, including annuities, or other (specified insurance product).
You have the right to have other persons present at the meeting, including family members, financial advisors or attorneys.
You have the right to end the meeting at any time.
You have the right to contact the Department of Insurance for information or to file a complaint (with consumer assistance telephone number provided).
The following individuals will be coming to your home: (All attendees and insurance license information, if applicable).
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
For regulation wording and wording for the various Disclosures, please see Attachment III in the ATTACHMENT section in the back of this text.
Advice is also given in this Disclosure that the applicant may want to call the County welfare Department, and are advised to contact an independent attorney.
Financial planners have often been asked by their elderly clients for assistance through the overlapping federal and state regulations about Medicaid (Medi-Cal in California) and its participation in funding long-term care and how annuities could be used in these situations. Many have avoided the questions and recommended that the client involve the services of a local elder law attorney.
Taking into consideration the requirements for participation in Medicaid, there still are technical and numerous questions that may be raised as to eligibility for long term care. In California – and in most of the other states as Medicaid is a joint program between the federal government and the states, this program - which incidentally is a welfare program not intended to fund long term care for those who can afford it – has eligibility requirements as stated above. A resident of the state qualifies for Medicaid if he/she has less than $2,000 in countable resources, and for an unmarried person, they are allowed to keep a monthly income of $35 (personal allowance) plus any health insurance premiums paid. The remainder of the monthly income is then paid to the nursing facility as a method of sharing the monthly cost.
For a married person, there is a community spouse resource allowance when one spouse is in a nursing facility and the other spouse lives at home, the Medicaid (Medi-Cal) program will pay nursing facility costs as long as the couple combined do not have assets worth more than $92,760 (for 2004) plus the $2,000. The minimum monthly maintenance needs allowance when a spouse is eligible for nursing home facilities, the other spouse living at home is allowed to keep a monthly income of at least his or her individual monthly income or $2319 (2004), whichever is greater. In some situations, a court may allow the couple to retain more than $92,760 + $2,000 in countable resources, and/or allow the at-home spouse to retain more than $2319 (2004) in monthly income.
Property exemptions to the above rules include one principal residence that is used as a home and will remain exempt if the applicant intends to return to it in the future and/or the spouse or dependent relative continue to live in it. If the home is sold, the money from the sale can be exempt if the money is used to purchase another home.
One motor vehicle is allowed, value not specified. It is not unusual for a person of modest means to purchase a Mercedes or Jaguar as that is one, legal, way of sheltering assets, particularly if the automobile keeps it value.
Irrevocable burial trusts or irrevocable prepaid burial contracts are exempt.
Now for the “annuity-related” part, IRAs, KEOGHs and other work-related pension plans are exempt if the family member in whose name the pension is attributed does not participate in Medicaid. If it is held in the name of a person who wants to participate in Medicaid (Medi-Cal) and payments of principal and interest are being received, the balance is unavailable and is not counted. The California Assembly Bill 210764 states that it is not necessary to annuitize, convert to an annuity, or otherwise change the form of the assets in order for them to be unavailable.
Prior to the passage of this legislation and insurance code in California, and still allowed in most states, non-countable inclusions are home and land and one car with no value limits; term life insurance up to $2,500 death benefit or face value; most qualified funds; the $2,000 cash or cash equivalent, and income producing property or an annuity in the payout phase.
To many agents, this cried for relief in the form of an immediate annuity, preferably a single premium immediate annuity (SPIA), thereby allowing the customer to shield a large amount of assets and receive income from the assets in the form of annuity payouts, and still allow the customer to be eligible for Medicaid/Medi-Cal. The purpose was to slow down the income stream and the erosion of income for a Medicaid candidate.
This was done by converting countable assets to non-countable assets using the SPIA by remaining under the countable asset cap. The SPIA often used for this purpose had a balloon provision, is irrevocable and non-assignable, and commutable only to the beneficiaries. The income stream from the annuity should be held as minimum and thereby protecting most of the principal (if not all). Further, the income period would be equal to or less than the life expectancy of the individual annuitant. The “implied” benefit is that the balloon payment would, in most cases, be made to a surviving spouse or heir of the institutionalized senior without the otherwise-necessary erosion of assets due to the long-term care provided. Some states do not allow the balloon payment annuities, but do offer a period certain SPIA option.
CONSUMER APPLICATION
A large insurer offered an 80-year old male that wanted to shield $100,000 before entering a nursing home, a single premium immediate annuity. The benefit for this amount was $256.63 per month with a final payment of $99,170 at the end of 6 years and 11 months. This would have brought in a total benefit of $120,470. For a 90-year old male with $100,000 to invest, with the same monthly benefit, at the end of 3 years and 10 months, the “balloon” payment would be $99,540.
Keeping in mind that Medicaid/Medi-Cal is a welfare program, funded by taxes and was designed to be provided for the poor and indigent who require nursing home care, assets of those on the program and which are not exempt under the program are used to reimburse Medicaid for the expenses involved in the nursing home care. There are laws prohibiting the transfer of property for several (usually 5) years prior to entering a nursing home in order to avoid the reimbursement. Therefore, it should be obvious to any reasonable person or institution, that avoiding payment part or all of the nursing home costs when assets are otherwise available, is like “stealing from the taxpayers.”
The state of California65 has taken immediate action to stop this unintended use of annuities to avoid Medi-Cal reimbursement. An annuity shall not be sold to a senior if the senior’s purpose in purchasing the annuity is to affect Medi-Cal eligibility and either of the following is true:
In the event that a fixed annuity specified in this code is issued to a senior, the issuer shall rescind the contract and refund to the purchaser all premiums, fees, any interest earned under the terms of the contract, and costs paid for the annuity. This remedy shall be in addition to any other remedy that may be available.
In marketing annuities to the elderly, it is not only wise, it may also be necessary, to involve a member of the legal profession, usually one practicing Elder Law. Many times an attorney is brought into the picture in estate or financial planning of an elderly client, for many reasons, generally very legitimately, by an insurance agent – particularly where the agent has represented an elderly person for several years and has gained their trust. In such a case, the attorney will be paid by the elderly person. In addition, financial planners and estate planners often work closely with attorneys, and properly so. Commercial insurance of various types often require the advice of the legal &/or accounting profession. Often, the influence of the attorney is such that the agent makes a sale that they might not have otherwise made. Regardless of how grateful the agent is, they may not share their commission or any other fees with an active member of the bar (particularly in California)66.
An agent, broker, or solicitor who is not an active member of the State Bar of California may not share a commission or other compensation with an active member of the State Bar of California. “Commission or other compensation” means pecuniary or no pecuniary compensation of any kind relating to the sale of renewal of an insurance policy to certificate of an annuity, including, but limited to, a bonus, gift, price, award, or finder’s fee.
Agents who specialize in the senior market in particular, often find themselves in a situation where an insured wishes to replace an existing insurance plan with another policy or plan. It is important to differentiate between “replacing” a plan (which is legal) and “twisting” (which is not legal). “Twisting” is where an agent or broker attempts to persuade a policyholder through misrepresentation to cancel one policy and purchase another one. Replacement is the substitution of one insurance policy for a policy of like kind and value (no misrepresentation involved). State laws universally protect policyholders from “twisting” and replacing usually requires notification of the existing insurer of a replacement of one of their policies, often giving them time to respond.
Replacement can be a “good thing,” such as when the first interest-sensitive life insurance policies were introduced. Millions of policyholders had life insurance policies where their cash value was credited at 3% (or similar amounts), during a time when anyone could walk into a bank and get a much higher rate of return on any investment. Legitimate, honest replacement possibly saved the life insurance industry from the “buy term and invest the difference” syndrome – or at least it had a very positive effect.
Regardless, replacement is always under the microscope because when a policy is replaced, the replacing agent is receiving a new commission. While companies may restrict the commission paid on their own business being replaced with another product of theirs, most agents today are multi-company licensed and are aware of new products. Therefore many are capable of providing an important service in “upgrading” policies because of lower mortality assumptions, lower expense assumptions, or higher interest income on their investments. Unfortunately, without strict regulation, many agents would be tempted to misrepresent benefits of one policy over an existing policy in order to receive a new commission. (Also see page 137)
This raises concerns from within the industry and from regulators. Replacing hurts persistency, and a higher-than-anticipated lapse ratio hurts the profits of the company, particularly since in many insurance products, it is not possible to raise premiums to compensate for the poor persistency. It should be known to those in the insurance industry that the first year expenses are higher than at any other time in the life of a life or annuity product – and other insurance products as well – because of not only the cost of issuing and underwriting a policy, but also because agent’s commissions are traditionally much higher the first year. Insurers must be protective of their persistency at all times, so they must be aware of any replacement. Even if the insurer is the recipient of the new policies, if there is a trend of replacement by an agency or by a product, the company then is aware that the same thing could happen to them in the near future.
According to state regulations67 Annuity “Replacement” means that a new annuity is going to be purchased and such annuity is known or should be known to the proposing agent or insurer that the annuity is or has been:
“Conservation “ means any attempt by the existing insurer or agent to try to “dissuade” a policyowner from replacing of the existing annuity but does not include routine administrative functions to preserve the business such as “late payment reminders, late payment offers or reinstatement offers.”68
“’Direct-response sales’ means any sale of (an)…annuity where the insurer does not utilize an agent in the sale or delivery of the policy.”69
“Registered Contract” means variable annuities and investment annuities under which the benefits vary in accordance with unit values held in separate accounts.70
Every application for an annuity submitted to the insurer must contain (a) a statement whether or not replacement of an existing annuity is involved in the transaction, and (b) a statement as to whether or not the agent knows that a replacement is involved in the transaction.
If there is a replacement involved, the agent is required to perform several functions.71
The duties of the replacing insurer are set out in detail in the regulations 72 which requires the replacing insurer to provide a detailed financial report on both the prior annuity and the proposed annuity in a fashion that allows the applicant to be fully informed of his/her financial situation in respect to the proposed transaction. Without stating so specifically, it must be assumed that the financial report must be factual and not just a “projection” based upon assumptions that may or may not be obtained – such as some financial projections used to sell Universal Life Insurance in the past.
When nonpreprinted illustration of nonguaranteed values are illustrated, the following statement must be attached (in bold or bright capitalized print:
“THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, OR VALUES THAT ARE SET FORTH IN THE ILLUSTRATION ARE NOT GUARANTEED, EXCEPT FOR THESE ITEMS CLEARLY LABELED AS GUARANTEED.”72A
In addition, the replacing insurer must provide in its policy or accompanying information delivered with the policy, a notice that the applicant has the right to an unconditional refund of all premiums paid, and such right would be effective from the date of delivery of the annuity and for a period of 30 days thereafter. If the contract is a variable contract, the return of the contract during this cancellation period entitles the owner to a refund of account value and policy fees paid for the policy. If the applicant had instructed the insurer to deposit the premiums into a specific fund, then the regulations provides instructions as how to determine the amount that would be returned to the applicant.
If the replacement is the result of a direct response sale, the replacing insurer must provide the required information that would otherwise be the responsibility of the selling agent.
It is a violation of this regulation if an agent or insurer recommends the replacement or conservation of an annuity by using “materially inaccurate presentation of comparison of an existing contract’s premiums and benefits or dividends and values, if any, or recommends that an insured 65 years of age or older purchase an unnecessary replacement annuity.
“Unnecessary replacement” is defined as selling an annuity that replaces an existing annuity which requires that the contract owner will pay a surrender charge on the replaced annuity. Further, the replacement annuity does not give the contract owner a “substantial financial benefit” over the life of the policy so that a “reasonable person would believe that the purchase is unnecessary.”73
However, if a policyowner purchases replacement policies from the same agent after indicating on the application that replacement is not involved, this constitutes a “rebuttable presumption” that replacement was intended in selling these annuities and further, this also establishes a “rebuttable assumption” that there was an intent of the agent to violate this regulation.
CONSUMER APPLICATION
Agent Jones represents Annuity Life Ins. and sells a Deferred Annuity to Smith as part of Smith’s estate plan. When the stock market was bullish, Smith told Jones that he wanted to take out his money and move it to a mutual fund as he expected that any penalty would be more than offset by the investment gains. Jones convinced Smith that a Variable Annuity was preferable because of tax reasons. Since Annuity Life did not sell Variable Annuities, he placed the new annuity with Vari-Ann Annuity Co. Since the replaced annuity was a deferred annuity and was replaced by a Variable Annuity, Jones felt this was not a “replacement.”
Smith was so pleased that he asked Jones to replace another annuity that he had purchased through another agent and company. Jones did so and again, he felt that it really was not a “replacement.”
When the stock market started to slide, Smith became concerned and indicated that what he really needed was to have an annuity that not only provided variable benefits, with some sort of a “floor” so he would not lose everything in case the market collapsed. Jones remembered that Annuity Life had recently offered an equity indexed annuity.
Smith was delighted that he could have some guarantee that he would not lose everything. Jones felt that this was not a “replacement” as it was a completely different product, so no such notice was provided to the insurer.
Technically, Jones had run afoul of the replacement regulations and it would probably be assumed that he was in violation of the regulations because the insurers had not been notified when the annuity plans were exchanged/replaced. The Code refers only to an “annuity” and makes no distinction between types of annuities being replaced or issued as a result of replacement.
In the above Consumer Application, Jones could be fined up to $1,000 for the first violation, In addition, for second or subsequent violations, he could be fined $5,000 to $50,000. For each violation – therefore he could possibly be fined as much as $101,000.
State Insurance Departments are protective of their elderly consumers and they have reinforced their concern by providing guidelines and requirements in order to regulate the activities of insurers and agents with respect to the replacement of existing life insurance and annuities when seniors are involved74 The stated purpose of these regulations is to protect the interests of life insurance annuity purchasers over age 65 by, as they state so clearly, “establishing minimum standards of conduct to be observed in replacement transactions, thereby assuring that the purchaser receives information with which a decision can be made in his or her best interest, at the same time, reducing the opportunity for misrepresentation and incomplete disclosures.” They also establish penalties for failure to comply with their requirements for replacement.
Exempt from these regulations when annuities are involved are group annuities, transactions where the replacing insurer and the existing insurer are the same. Such agents must provide to and leave with the applicant, a written statement containing information relating to premiums, cash values, death benefits, and outstanding indebtedness, and dividends and dividend accumulations, if any, for the existing policy, both immediately before and after replacement, and for the proposed annuity.
Each agent who accepts an application must submit to the insurer with which an application for an annuity is presented, or as part of each application, both of the following:
(1) A statement signed by the applicant as to whether replacement of existing life insurance or annuity is involved in the transaction.
(2) A signed statement as to whether or not the agent knows replacement is or may be involved in the transaction.
Where a replacement is involved, the agent shall do all of the following:
(1) Present to the applicant, not later than at the time of taking the application, a "Notice Regarding Replacement of Life Insurance" in the form (see below). The notice shall be signed by both the applicant and the agent and the original left with the applicant.
(2) Obtain with or as part of each application a list of all existing life insurance or annuities to be replaced and properly identified by name of insurer, the insured and contract number. If a contract number has not been assigned by the existing insurer, alternative identification, such as an application or receipt number, shall be listed.
(3) Leave with the applicant the original or a copy of all printed communications used for presentation to the applicant.
(4) Submit to the replacing insurer with the application a copy of the replacement notice.
Each agent or broker shall present to an applicant the following notice:
NOTICE REGARDING REPLACEMENT
REPLACING YOUR LIFE INSURANCE POLICY OR ANNUITY?
Are you thinking about buying a new life insurance policy or annuity and discontinuing or changing an existing one? If you are, your decision could be a good one--or a mistake. You will not know for sure unless you make a careful comparison of your existing benefits and the proposed benefits.
Make sure you understand the facts. You should ask the company or agent that sold you your existing policy to give you information about it.
Hear both sides before you decide. This way you can be sure you are making a decision that is in your best interest.
We are required by law to notify your existing company that you may be replacing their policy.
___________________ ____________________ ____________________
(applicant) (agent) (date)
Every life insurer must inform its field representatives, agents. and other personnel responsible for compliance with these requirements and they must require with, or as part of, each completed application for an annuity a statement signed by the applicant as to whether such proposed insurance or annuity will replace existing life insurance or annuity. Plus, the agent must sign and submit a statement as to whether he or she knows replacement is or may be involved in the transaction.
If such a replacement is involved, the insurer must require from the agent. along with the application for life insurance or annuity:
(i) a list of all of the applicant's existing life insurance or annuity to be replaced, and
(ii) a copy of the replacement notice provided the applicant pursuant to this regulation.75
The existing annuity must be identified by name of insurer, insured, and contract number or an application or receipt number if a number has not otherwise been listed.
Further, the insurer is required to send within three working days after the application has been received, to each existing life/annuity insurer written information advising them that the policy will be replaced, with proper identification of the policy, along with a policy summary, contract summary, or ledger statement containing policy data on the proposed life insurance or annuity.
Within 20 days from the date that the written communication is received by the existing insurer, (plus all the substantiating materials), the existing insurer must furnish the policyowner with a policy summary for the existing life insurance or ledger statement containing policy data on the existing policy or annuity and information relating to premiums, cash values, death benefits, and dividends, if any, shall be computed from the current policy year of the existing life insurance and will include the amount of any outstanding indebtedness, the sum of any dividend accumulations or additions, and may include any other information that is not in violation of any regulation or statute. When annuities are involved, the disclosure information shall be that in the contract summary.
Then the replacing insurer may request the existing insurer to furnish it with a copy of the summaries or ledger statement within five working days of the receipt of the request. The replacing insurer and the existing insurer must maintain all evidence of the policy summaries and other identifying information and conservation efforts, for a period of at least 3 years.
The replacing insurer must provide in its policy or in a separate written notice which is delivered with the policy that the applicant has a right to an unconditional refund of all premiums paid and this right may be exercised within a period of 30 days commencing from the date of delivery of the policy. In the case of Variable Annuity contracts, variable life insurance contracts, and modified guaranteed contracts, return of the contract during the cancellation period shall entitle the owner to a refund of account value and any policy fee paid for the policy. The account value and policy fee 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.
If in the solicitation of a direct response sale, an insurer does not propose the replacement, and a replacement is involved, the insurer must send to the applicant with the policy a replacement notice as described above. In those instances the insurer may delete the last sentence and the reference to signatures from the form without having to obtain approval of the form from the commissioner.
If the insurer proposed the replacement it must:
(1) Provide to applicants or prospective applicants with or as part of the application a replacement notice as indicated above (Notice regarding replacement).
(2) Request from the applicant with or as part of the application, a list of all existing life insurance or annuities to be replaced and properly identified by name of insurer and insured.
(3) Comply with the requirements of the regulations and appropriate insurance code.
F A violation of this article will occur if an agent or insurer recommends the replacement or conservation of an existing policy by use of a materially inaccurate presentation or comparison of an existing contract's premiums and benefits or dividends and values, if any, or recommends that an insured 65 years of age or older purchase an unnecessary replacement annuity.
If an agent consistently replaces policies of a particular individual and the individual does not indicate that replacement was involved, it is therefore assumed that the agent is in violation of the replacement regulations.
“Misrepresentation” is a fundamental problem that has existed for generations to some degree or other. The California Insurance Code does not allow misrepresentation and it defines misrepresentation quite well.76
Any insurer, officer or agent of the insurer, or broker or solicitor of the insurer, must not allow or “cause” any misrepresentation in respect to
(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.”
A person shall not make any misrepresentation to any other person for the purpose of persuading another to take out an insurance policy, or to persuade another to refuse to accept a policy that was issued as the result of an application and thereafter, take out another policy. Further, no person shall persuade a policyholder in any insurer to lapse, forfeit or surrender his insurance.
An agent cannot misrepresent or compare insurers or policies to an insured which are misleading, for the purpose of persuading the person to lapse, forfeit, change or surrender his insurance – whether temporary or permanent insurance.77
Any person violating the (above) 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.78
If an insurance agent, broker, or solicitor knowingly violates any these provisions, the commissioner may hold a hearing and after doing so, may suspend the license of any such person for (a period) not exceeding three years.79
The Code provides that if an insurance company knowingly violates any of these provisions – or if the company knowingly permits any officer, agent or employee to violate any of these provisions, the Insurance Commissioner may suspend the certificate of authority to operate in that state for the class of insurance in which such violation occurred.80
The California Code81 states that “(a)ny person may be compelled to testify and produce books and writings at the trial or hearing of any person charged with violating any provision of “(the appropriate Code Section)82 “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.”
These penalties involves certain actions or failure of action including
CONSUMER APPLICATION
Agent Smith has a client – Adam - who is a prospect for an annuity to replace funds that had been invested in Certificates of Deposits but who is concerned that he may need the principal earlier than the annuity term (10 years) but he would be penalized by withdrawal penalties. Smith discussed this with the Agency Director at Acme Life & Annuity and they agreed that a projection in which the penalties were ignored would do the trick, especially since Smith was positive that his client would not need the funds before 10 years as his business was doing quite well.
Adam purchased the annuity and since no penalties were discussed in the projections, he assumed that there were none and the company had so agreed to this.
The annuity had been in force for 5 years when the Adam’s company’s principal supplier announced that they were going out of business. Adam’s accountants decided that the supplier could be purchased for a modest sum and they could also run that company, solving their immediate business problem. Adam’s company was strapped for cash at that particular time, so remembering the annuity, he withdrew the principal from the annuity. Much to his dismay, he did not receive all of the funds due to the penalties. Thereupon, Adam sued Smith and Acme and the situation was duly reported to the Department of Insurance which conducted its own investigation.
During the hearing before the Commissioner, Smith and the Agency Director for Acme were interrogated. The Department reviewed the “phony” projection, but Smith and the Director pleaded innocent as they did not actually do the projection themselves, but Claire, a young Associated in the Actuarial Department did the projection. Claire was called to testify, but her attorney advised her not to acknowledge that she had anything to do with the projection. However, after the Code was reviewed, she was able to testify that she had created the projections upon direction of the Agency Director, and she thought it was to be for agent training or something, not given to a prospect. She could not be prosecuted for her part in this sham.
Before an agent can sell a life insurance policy or annuity to an elder (defined for this purpose as those age 65 or older), they must advise the elder (or the elder’s agent) in writing, “that the sale or liquidation of any stock, bond, IRA, certificate of deposit, mutual fund, annuity, or other asset to fund the purchase of the product, may have tax consequences.” There could also be other penalties, such as early withdrawal penalties. In any event, the elder (or his agent) may wish to obtain an independent legal and/or accounting, or other financial, advice before selling, liquidating, or converting any asset.83A Also note discussion under discussions on “suitability.”
It is almost unnecessary to formally state, but regulations state that an agent may not sell or fraudulently misrepresent a financial product to an elder on the basis of the treatment of any asset under the Med-Cal regulations as it pertains to the determination of eligibility.
For regulation wording and wording for the various Disclosures, please see Attachment III in the ATTACHMENT section in the back of this text.
Advice is also given in this Disclosure that the applicant may want to call the County welfare Department, and are advised to contact an independent attorney.
STUDY QUESTIONS
1. A major concern of many elderly folks is
A. outliving their resources.
B. buying the right automobile.
C. leaving their money to charity
D. living to more than 100.
2. When an agent offers to sell an annuity in California, one of the duties of the agent is
A. to tell the prospect how much commission will be paid on the annuity.
B. to inform the prospect as to the financial standing of any competing insurer.
C. to make sure that the prospect is wealthy and in good health.
D. to advise the client that they may want to consult an independent legal or financial advi-
sor before selling any asset.
3. If a Variable Annuity is sold to a senior citizen and returned within the 30 day cancellation period, and the client has not directed that the premium for the contract be invested in the mutual funds underlying the contract during the cancellation period, then
A. this will have the effect of voiding the annuity.
B. the insurance company must provide continued coverage for the client for one year.
C. there will be no chargeback against the agent.
D. the insurer may take legal action against the client for misrepresentation.
4. Whenever an insurer provides an annual statement to a senior policyowner of an individual annuity contract,
A. the insurer must also provide the current accumulation value and current cash surrender
value.
B. it must be hand-delivered by the agent who must explain it all to the client.
C. then no other information as to the particular annuity need be submitted to the client.
D. they must so notify the Department of Insurance and the SEC.
5. One of the most used methods to get seniors to attend a meeting in order to sell investment products, including annuities, is to hold a “seminar” luncheon at a fancy restaurant with a speaker who is an “expert” in some area of interest to the seniors. There is no problem with this
A. as long as the seniors do not have to pay for their meal.
B. as long as the speaker is an actual expert in that particular field, even though they may be
sponsored by an insurance organization whose products are not discussed in the
invitation.
C. if there is an announcement at the seminar that insurance products will be available after
the meeting.
D. the advertised speaker is, indeed, an expert in the field as advertised, and if prior notice
was given in the invitation that insurance products will be offered for sale and there will
an insurance sales presentation.
6. When a marketing scheme to sell insurance or annuities through a seminar or meeting, created by misrepresentation or identity and touting the use of a living trust as a financial planning device this is considered as a
A. educational seminar.
B. citizen’s gathering which is their constitutional right.
C. living trust mill
D. presentation as a public service.
7. The above (6) situation is
A. legal and within the rights of those making the presentations.
B. often used and is endorsed by the National Association of Insurance Commissioners.
C. is a marketing technique taught by the American College of Life Underwriters.
D. illegal and may result in cease and desist orders, financial penalties and suspension or
revocation of the certificate of authority or insurance licenses.
8. Contacting a senior citizen for the purpose of selling insurance or annuities as the result of a lead system is
A. illegal.
B. legal provided that the agent shows his license during the meeting.
C. legal provided that at time of contact, the agent must disclose the fact that the agent is
there as a result of the lead, and abides by other regulations in this respect.
D. only legal where the agent performs other services than selling insurance, such as selling
medical supplies, giving the senior an informational publication, etc.
9. Any person who meets with a senior in the senior’s home for the purpose of selling insurance or annuities
A. must deliver a notice in writing to the senior no less than 24 hours prior to that meeting.
B. may legally do so simply by asking the prospect if he can come in for a little while and
discuss an item of importance.
C. must have a professional designation such as CLU, ChFP, or CPA.
D. must be dressed presentably, treat the prospect with respect, and ask for the telephone
number of the prospect’s physician.
10. The State of California has taken action to stop the sale and use of annuities
A. that are sold to persons over the age of 70 ½.
B. for estate planning purposes.
C. to provide additional retirement income for a person on Social Security.
D. to avoid Medi-Cal reimbursement where the senior would otherwise qualify for Medi-
Cal and the purpose of purchasing the annuity is to affect Medi-Cal eligibility and
after the purchase of the annuity, the senior or spouse would not qualify for Medi-Cal.
ANSWERS TO STUDY QUESTIONS
1A 2D 3A 4A 5D 6C 7D 8C 9A 10D