CHAPTER ONE - ANNUITIES

 

This text will discuss the various reasons that those who market life insurance products, including annuities, can find themselves in difficulty with not only their clients, but also their insurer and with regulatory bodies.  Simply put, this is an ethics manual, but it goes further inasmuch as it will also discuss some common illegal activities.  More than anything, this is a "DO NOT" text and it is hoped that the representative can "stay out of trouble" if they follow these warnings.  Be informed, however, that the field of insurance contains many brilliant marketing experts that can—and often do—find new "inventive" methods of marketing insurance that may or may not be ethical and which, frequently, cause to be created new laws, rules &/or regulations.

Therefore, "ethics" per se, are discussed so that when situations arise that may or may not be ethical (or, sometimes, legal) the individual will (1) recognize an ethical dilemma, and (2) arrive at an ethical (and legal) solution.  Professionalism is stressed, but it has to be acknowledged that some persons, who market life insurance products, may consider the sale of insurance as a secondary occupation, therefore, the time necessary to achieve a professional designation—such as Chartered Life Underwriter (CLU) or ChFC—may not be realistic.  However, The National Association of Insurance and Financial Advisors, which represents many NASD-licensed registered representatives and registered investment advisors offers advanced training and has its own Code of Ethics (See last page of this text for a Code of Ethics.)

Please note that this text uses the masculine terms exclusively for purposes of simplicity and conservation of time.  This is certainly not intended to slight those in this industry of the female gender in any manner.

 

It should also be noted that this text discusses ethical issues and is not intended as a text on life insurance or annuities.  It is assumed that those who read this text are somewhat versed in life insurance and annuities, at least so that they can follow the discussion of ethics in marketing the various products.  Characteristics of the products will be discussed in respect to the ethical problems that may arise because of such characteristics. 

Important points will be noted by being boxed and "pointed at" (F) for emphasis.  "RULES" will also be boxed for emphasis—a "Rule" does not necessarily indicate either a legal or an ethical "rule," but is presented as a "suggestion" to the marketer to help avoid legal/ethical problems so that he will not be tagged as a possible "trouble maker."

To start this discussion, the New York Times very recently ran a story about how unethical agents were marketing certain kinds of (ethical) annuities to senior citizens.  This has caused a lot of discussion nationwide, and is a good place to start this discussion

From an article in the New York Times, July 8, 2007, by Charles Duhigg

(Names of agents, insurers and clients are not shown as there are continuing legal actions.)

Elderly clients thought they had every reason to trust (the agent involved) as a financial counselor.  After all, the … agent had become a "Certified Senior Advisor" in 2002, a credential he made sure to advertise on fliers sent to retirees.  He did not mention how easy it had been to get that title.

(The agent) is one of tens of thousands of financial advisers working hand-in-hand with insurance companies to market themselves to older Americans using impressive-sounding credentials like Certified Elder Planning Specialist, Registered Financial Gerontologist, Certified Retirement Financial Advisor and Certified Senior Advisor.

Many of these titles can be earned in just a few days from for-profit companies, and sound similar to established credentials, like Certified Financial Planner that require years of study, difficult tests and extensive background checks.

"The degree isn't worth the paper it's written on, "said (an insurance executive) who took the Certified Senior Advisor exam but does not use the credential.  "For many agents," he said, "it's a scam, a way to put a title on a business card that impresses gullible seniors."

(The agent) had paid $1,095 for a correspondence course, then took a multiple-choice exam with questions like, "Marketing can be described as" (The answer: "The process or technique of promoting the sale or distribution of a product or service.")  Like more than 18,700 other applicants since 1997, he passed,

Insurance companies, eager for sales representatives embraced (this agent) as they have thousands of other newly credentialed advisers.  The following year, insurers paid him commissions worth $720,000 as his business with retirees soared.  But many of those sales same from steering older Americans into unwise investments, (state) regulators contend in a lawsuit.

(The agent denied all wrongdoing), but one of his clients, a 73-year-old widow caring for a son with Down syndrome—said he tricked her into buying complicated insurance contracts that left her unable to pay dental and home-repair bills.

"His office was filled with things saying he was certified to help seniors," said (that client) "The only one he really helped was himself."

Many graduates of these short programs say they only want to help older Americans.  But they are frequently dispensing financial counsel they are unqualified to offer, advocates for the elderly say.  And thousands of them are paid by some of the largest insurance companies … to sell elderly clients complicated investments that economists say most retirees should never own.

The price for these insurers and sales agents is the $15 trillion held by Americans 65 and older, the largest pool of assets ever amassed by an aging population, according to the Government Accountability Office.

"The insurers are happy to turn a blind eye to what salesmen are doing," said Minnesota's attorney general … who is suing several companies … contending their products are inappropriate.

(Three insurance companies) whose revenues last year were a combined $163 billion, said they investigate the backgrounds of all agents, screen al sales to consumers to make sure they are appropriate, and have terminated representatives using improper sales methods.  Those companies said they were not aware of abusive methods taught at any seminary they endorsed.

In a statement (one of the companies mentioned) said that company did not tolerate misrepresentation.  "(It) is a leader in education opportunities and quality for agents," the statement reads.  Fewer than half of one percent of its customers have every complained, according to the company.

(Another company), in a statement, said any evidence of sales agent misconduct, without exception, results in immediate termination.

Nonetheless, complaints over sales of insurance products have soared.  In particular, grievances have stemmed from annuities, which are insurance contracts that offer buyers monthly or yearly income in exchange for one large lump-sum payment and are designed to appeal to anyone worried they might outlive their savings.

More than one-third of all cases of financial exploitation of the elderly involve annuities, according to the North American Securities Administrators Association, a group of regulators.  Hundreds of lawsuits have been filed against insurers over annuity sales to the elderly.

A judge in Minnesota ruled this year that just one class-action suit … could encompass as many as 400,000 plaintiffs.

In interviews, sales agents who have been accused of wrongdoing said they followed the guidance of insurance companies.  "I did what I was told," said (the agent mentioned in this story) before declining to further discuss the charges against him.  "If it was so wrong, why did everyone let me do it for so many years?"

Annuities are among the insurance industry's fastest growing products, with sales increasing 30 percent since 20101, to $182.8 billion last year, according to the Insurance Information Institute.

Regulators say annuities that begin paying immediately are often sold as investments for retirees.  A 73-year-old customer of one popular annuity, for instance, is guaranteed to begin immediately receiving $252 a month for life, in exchange for a $30,000 payment.  If the buyer lives more than 10 years, that income is greater than original amount paid.

But the vast majority of annuity sales do not offer immediate payouts.  Instead, they require purchasers to wait as long as 10 years to begin receiving benefits.  Such contracts, known as deferred annuities, made up 97 percent of all annuity sales last year.

Financial experts say deferred annuities are a good option for wealthy investors looking for ways to transfer wealth to their heirs while avoiding large tax payments.  But for retirees living off their savings, most deferred annuities are a bad choice, say experts, because elderly buyers are likely to die before the contract begins paying out.

Deferred annuities, however, offer sales agents the richest commissions, which is why so many of them are sold every year, regulators say.  Selling a $100,000 Deferred Annuity, for example, typically earns a sales representative $9,000, though buyers are prohibited from touching much of their money for 10 years.  Annuities with shorter tie-ups carry much smaller commissions.

Before (an elderly widow) accepted invitation to one of (the agent's) seminars in 2002, she had never balanced her checkbook.  Her husband dies of colon cancer six months earlier.  Though she had raised five children, including a son with Down's syndrome, she knew almost nothing about her family's finances.  (The widow) asked (the agent) to handle her $75,000 savings.

(The agent) transferred (her) savings into deferred annuities sold by (an insurer).  Those contracts, which were impossible cancel without paying large penalties, prevented (her) from receiving the annuity's payouts for five years, unless she paid significant fees. 

In October, (her) dentist told her she needed a $3,200 bridge replacement.  Repairmen said she needed a new furnace and gutter work that would cost a combined $6,500.

She contacted (the insurance company) and explained she had never intended to buy the annuities.

"I am 72 years old and need access to my money now," she wrote.  She wrote the contracts were never fully explained to her, a claim (the agent) denies.

(The insurer) initially denied her request.  An executive gold her they were siding with (the agent's) account that the annuities were sold properly.

When (the insurer) learned that the (state) regulators had sued (the agent) in March, the company cut its ties to him and refunded (her) money.

(The widow) said her complaints alone should have spurred the company to action.

"How many other seniors have been tricked into these things but are ignored when they complain?" she asked.

 

 

 

And if that isn't enough, on September 5, 2007, under the headline

"Investment pitches target elderly"

A related story starts out:

Less than a year before he died, an ailing, wheelchair-bound Arthur Moyer converted his $500,000 life savings into a complex investment he could not tap for a decade without incurring steep fees. [Guess what kind of investment!!]

"The 79-year-old former machinist from Pennsylvania poured his money into a Deferred Annuity at the urging of a salesman who collected a hefty commission and presented himself as a retirement expert… …Moyer spent the final weeks of his life fending off depression."

There was good news, though, on the day he was buried the insurance company agreed to unwind the deal and return his life savings.  He was buried with a copy of that letter in his coat pocket.

The remainder of the story closely follows the previous story; just change the faces and the places.  One little tidbit that was not mentioned before, when the state and federal regulators investigated this situation, they discovered that third-party marketing companies are creating impressive investment advice booklets that are sent out to retirees as lead generation, but the booklets are not written by the agent, as the booklet represented, but by a company that makes them and then sells them to the agents.

 

 

THE POSSIBLE PROBLEMS WITH ANNUITIES

In order to better understand "ethics" in marketing life insurance and annuity products, plus the legalities that can affect the marketing, a good place to start is with a discussion of annuities.  There are several reasons for this: 

1. annuities are easily misrepresented, while simple in concept they can be full of hidden opportunities for misrepresentation;
2. some annuities are "insurance" products only, others are "securities," while others have the features of both;
3. the plans may be sold by dually-licensed agents (which can mean that securities dealers are not familiar with the "insurance" type, while insurance agents are not familiar with the "securities" aspect);
4. and certain annuities are designed to be sold to the older population (while others are designed to be sold to the younger folks).

On the other hand, annuities that are properly sold to the correct market have been around for years and many of the retired population are happily receiving checks monthly from an insurance company—in effect,

 

The safety of their funds is perhaps the most important factor in annuity sales as most versions are backed by the assets of a large insurance company with unimaginable billions of assets, allowing the annuity holder to sleep at night knowing that regardless of flood, hurricane winds or famine, his check will be in the mailbox (or credited to his bank account) every month.

 

This will be discussed in more detail later, but some of the older agents may remember when Baldwin United Life Insurance Company sold millions of dollars in annuity premiums, and then went bankrupt.  Widows and widowers and retired folks by the thousands were in near hysteria until the Departments of Insurance and the solvency fund stepped in.  While it is true that many annuitants received less that they expected, the insurance departments, working together, were able to place the annuities with larger, solid companies (such as Metropolitan Life Insurance Co.).  The end result was that the annuitants eventually received what they had expected. 

 

IMMEDIATE vs. DEFERRED ANNUITIES

In order to understand the ethical problem with marketing an annuity to an elderly person, one must realize that an Immediate Annuity is very often and effectively written on elderly persons who have large sums of money that they want to receive as income while they are still alive.  There is generally no problem with marketing an Immediate Annuity to, say, a 65 year-old retired person who has a large sum of money from, for instance, an employee bonus program (or maybe he got lucky with the horses…) and wants money from these funds to supplement his Social Security and/or retirement plan. 

Deferred Annuities are different as they are designed to accumulate funds that usually are paid in to the insurance company as annuity premiums on a monthly basis.  Based on the age of the annuitant the premiums paid in,  and the length of time that the premiums are paid before the annuity "annuitizes," (i.e., benefits start being paid out) determines how much money the annuitant will receive each (usually) month.  Without going into all the details, Deferred Annuities have a special and respected place in retirement planning.

Now, remember the widow who invested her money at age 72 (and who had never handled her own checkbook) into a Deferred Annuity and who needed money NOW.  There are several rules that are important and that are in play here.

 

Sure, there are exceptions, but if there are such exceptions realize that you are treading on thin ice.  For instance, if the person is wealthy and has a financial advisor (CPA or such) that fully understands the product and can also explain it to the prospect, and who is not investing all of their funds into the product, then it may be relatively safe.  And the age is not engraved in stone, in some cases Deferred Annuities should not be sold to a person over 60 or 65.

Is this is a common problem?  What happens is that the senior citizen just does not understand that if the annuitant wants to withdraw funds prior to its annuitization date, there will be a penalty.  And the penalty will probably be big.  This also means, ethically:

 

How do you know if they will have an immediate need for cash?  Ask them!  Over and over again until you (ethically) agree that, they will in all likelihood, never need to withdraw funds from the annuity. 

Ethical dilemma can arise here: As an illustration—

Agent Joe has discussed a Deferred Annuity with his client and friend of several years, Bill, and when Bill sold his bar when he was 55, Bill told Joe that "now is the time for an annuity."

Joe, being a friend, knew that Bill's wife was just waiting for him to sell his bar so that she could run off with her body-builder boyfriend.  Or, perhaps, Joe knew that Bill was not a good money manager and he had 3 kids, two in college and one in High School.  Bill had put aside some money for their education, but Joe asked how much was in the fund as he Joe was certain that the fund was inadequate for the education of the children.  Joe was also the P&C agent and knew that there was still a mortgage on the house and because of where the house was located; the homeowner's premiums were going up each year. 

In essence, Joe was personally convinced that Bill was going to need some of the money that he was going to put into the annuity, relatively soon.  Joe explained, carefully and fully, the impact of the penalties for early withdrawal, but it seemed not to make an impression on Bill.  He knew that he was not a good money-manager, so he just wanted to be rid of the money and as he said, "put the monkey on the insurance company's back" to make sure that he had some money when he reached 65. 

What does Joe do?  Can he, ethically, write the annuity that Bill requested, or can he just tell Bill, "I am sorry, but as a friend and as your agent, this is a mistake for you to put all of your funds into a Deferred Annuity at this time."  Bill says, "OK, then I will go to Agent Ron who has wanted my insurance business for a long time, and he will also rewrite all of the insurance that you presently handle into another company."

This is a typical ethical situation in insurance.  In these kinds of situations, what does the agent do? 

The Code of Ethics of the American College (CLU, ChFC and CPCU) contains two ethical imperatives which mandate that

 

Many scholars believe that the Golden Rule (do unto others …) is the basic, driving force behind all ethics.  Maybe so, but for the insurance agent—and in particular, the professional—insurance agent, the above rule should be inscribed in granite, posted on the courthouse steps, and tattooed on the forehead of all new agents —or at least remembered and USED.

(This rule is important enough to show it twice).

 

Did the agent provide competent advice to the 72 year-old widow in the article?  Of course not!  Ditto the 79-year old very ill customer.

Does the agent have a legitimate alibi that the insurance company had never said anything about selling these annuities to senior citizens before?  This is like saying, "I never robbed the bank, officer, I just drove the getaway car."  The insurance company may share some of the blame (this will be discussed later) but that does not alleviate, in the least, the unethical behavior of the agent.

MARKETING TO SENIOR CITIZENS

California regulations may be the most stringent in the country and as such, are important because marketing of insurance products to Senior Citizens has been of concern to all Insurance Departments for some time, and some have also taken rather stringent steps.  California regulations may be harbingers of tightening of the rules involving marketing insurance to the elderly and as such, are worth of our consideration.  For instance, the California Department of Insurance requires that:

"All individual life insurance policies and individual annuity contracts for senior citizens that contain a surrender charge period shall either disclose the surrender period and all associated penalties in 12-point bold print on the cover sheet of the policy or disclose the location of the surrender information in bold 12-point print on the cover of the policy, or printed on a sticker that is affixed to the cover page or to the policy jacket.  " (10127.12 California Insurance Code [CIC])

The CIC also says:

"(a) All insurers, brokers, agents, and others engaged in the transaction of insurance owe a prospective insured who is 65 years of age or older, a duty of honesty, good faith, and fair dealing.  This duty is in addition to any other duty, whether express or implied, that may exist.

(b) Conduct of an insurer, broker, or agent, or other person engaged in the transaction of insurance, during the offer and sale of a policy or certificate previous to the purchase is relevant to any action alleging a breach of the duty of good faith and fair dealing.  (CIC Section 785)

And, if you think that this is tough, for those not familiar with California regulations, the following regulation is one of the strictest in the country and it is fair to say that eventually nearly all, if not all, states will follow suit.

"(a) this section applies to the sale; offering for sale, or generation of leads for the sale of life insurance, including annuities, to senior insureds of prospective insureds by any person.

(b)  Any person who meets with a senior in the senior's home is required to deliver a notice in writing (our emphasis) to the senior no less than 24 hours prior to that individual's individual meeting in the senior's home.  If the senior has an existing insurance relationship with an agent and requests a meeting with the agent in the senior's home the same day, a notice shall be delivered to the senior prior to the meeting. Such notice shall be in substantially the following form, with the appropriate information inserted, in 14-point type:

"(1) during this visit or a followup visit, you will be given a sales presentation on the following (indicate all that apply):

     ( ) Life insurance, including annuities

     ( ) Other insurance products (specify): _________________.

(2) You have the right to have other persons present at the meeting, including family members, financial advisors
 or attorneys.

(3) You have the right to end the meeting at any time.

(4) You have the right to contact the Department of Insurance for information, or to file a complaint. 
(The notice shall include the consumer assistance telephone numbers at the department)

(5) The following individuals will be coming to your home: (list all attendees, and insurance license information, 
if applicable)"

(c) Upon contacting the senior in the senior's home, the person shall, before making any statement other than a 
greeting, or asking the senior any other questions, state that the purpose of the contact is to talk about insurance, 
or to gather information for a followup visit to sell insurance, if that is the case, and state all of the following 
information:

   (1) The name and titles of all persons arriving at the senior's home.

   (2) The name of the insurer represented by the person, if known.

(d) Each person attending a meeting with a senior 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.

(e) The persons attending a meeting with a senior shall end all discussions and leave the home of the senior immediately
 after being asked to leave by the senior.

(f) A person may not solicit a sale 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. (CIC 789.10)

 

Why, do you suppose, such stringent regulations regarding marketing to Seniors was necessary in California?  The answer is, obviously, that agents that operated in that market were unethical.  These types of regulations are inevitable after an Insurance Department receives complaints as to how they were treated by agents, particularly from senior citizens.  If the agents in California had operated ethically, then these tough regulations would not exist.

Look at the regulation and see where it requires what would otherwise be, an ethical act.  Shouldn't every agent make sure that the prospect knows who he is, why he is there and what he is selling?  While the 24-hour notice before a senior can be approached may seem a little over-the-top at first blush, this allows the senior to contact family members or others upon which they rely, to be notified that the agent will be visiting him shortly and what it is all about.  Everything else in this regulation should have been performed anyway. 

 

SALES PRACTICES IN MARKETING TO SENIORS

It would be nice if there were no such thing as an “unethical” agent, but unfortunately this is not the case.  Therefore, regulations are in force to correct the practices that cause irreparable harm to our industry and to our profession, as noted above in California.  The most often targeted of our population by these miscreants are the elderly for a variety of reasons.  Fortunately, the various state's Department of Insurance and their legislatures have created special types of regulations for the protection these citizens, particularly true in respect to annuity sales.  This section discusses the sales practices of agents marketing annuities to anyone regardless of age, recognizing that this particularly applies in of marketing to the seniors.

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.  For any such advertisement or any other lead method that is directed towards those ages 65 or older, regulations generally provide that it 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.

It is also illegal in most states 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.  Even where this may not be illegal, it certainly is, at least, unethical.  Regulations in some states have gotten so severe that 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.”

ADVERTISING

For the purpose of this discussion and regulations, “advertising” applies not only to ads, brochures, newspaper and other media articles, television and radio advertising – but primarily printed material.  Envelopes, stationery, business cards and any other material that is used by an agent or insurer that are designed to describe the insurance product and to attempt to encourage a purchase of the insurance product – annuity for this discussion.

Simply put, the regulations are intended to insure that the insurers and agents treat their clients honestly and openly.  If such regulations are not inexistence, then ethics must suffice (or regulations will follow). 

 

A lot of the problems can be avoided by just using "common sense."  If the advertisement hints that the annuitant (particularly a Variable annuitant) will enjoy an asset growth at an 8% rate in the current market, and whether it comes right out and says it or in some fashion subliminally—such as an advertisement showing a retirement home or whatever, but in the background is a representation of a balance sheet that indicates at least an 8% growth—is not only unethical, illegal in most states, but is just plain stupid. 

 

Advertising is also the material that is used to generate leads through reader response, generally followed by an agent calling.  It can advertise a meeting or seminar at which information is provided (also covered in detail in a separate section), or simply advertising the product of the insurer.  If the advertisement is directed towards those age 65 or older and if the advertisement is used for leads, in most states the advertiser must disclose in the advertisement that an agent may contact the person – if this is intended.

If the name of the prospect is obtained from a lead source, the source must be disclosed in some states (California for instance) and should be disclosed everywhere to those over age 65.  A senior can get rather upset if they think someone is trying to get them involved with something that they know nothing about. 

Even though it is in nearly all agents' contracts, it does not hurt to point out that the insurance company must give an agent permission in writing before the agent can advertise the product.

EXEMPTIONS FROM ADVERTISING REGULATIONS

While the regulations are quite specific in respect to requiring that every licensee shall prominently affix, print or type on business cards, price quotes or advertisements, its license number, address or fax number, and the word, “Insurance” must be displayed (as stated above) on the printed matter, there are certain exception, one of which is that Life Insurance policy projections and illustrations, or to life insurance cost indexes as required by other regulations, are exempt, but they must comply with other appropriate regulations.

 

LOANS

If an agent persuades or causes a client to cosign or make a loan, investment or gift, or provide a future benefit through a right of survivorship for the benefit of

1. the agent,
2. a person with a relationship to the agent by birth, marriage or adoption,
3. a friend or business acquaintance of the agent, or
4. domestic partner of the agent –

the agent’s license may be suspended or revoked, in all jurisdictions.

Normally, this would not apply if the client is related to the agent by birth, adoption or marriage; or is a domestic partner of the agent.

AGENT BENEFICIARIES

The agent’s license may be suspended or revoked if an agent persuades or causes a client to designate as a trust beneficiary or beneficiary or owner of a life insurance policy or annuity for the benefit of the agent, a person with a relationship to the agent by birth, marriage or adoption, a friend or business acquaintance of the agent, or a domestic partner of the agent.  This does not apply if the client is related to the agent by birth, adoption or marriage, or is a domestic partner of the agent.

AGENT TRUSTEE

The agent’s license may be suspended or revoked is the agent persuades or causes a client to designate as a trustee under a trust, the agent, etc., as listed above.  There is an exception where the agent is designated as a trust or a testamentary or inter vivo trust if the agent is also an attorney in any state and the agent is not a seller of insurance to the Trustor of the fund.

AGENT HOLDING POWER OF ATTORNEY

An agent’s license may be suspended or revoked if an agent has a power of attorney for a client and has sold the client an insurance product for which the agent has received a commission.  Further, the license may be suspended or revoked if the agent has used the power of attorney to purchase an insurance product on behalf of the client and for which the agent has received a commission.  This is the rule in nearly all states, and, of course, it does not apply if the client is related to the agent by birth, adoption or marriage, or is a domestic partner of the agent.

SPECIAL SENIOR DIFFICULTIES

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.  Most states have recognized this problem and have enacted regulations to assist in the marketing of insurance and other financial products to elder citizens.  These regulations are, in effect, the result of unethical situations that have been so abused that they are now regulations.  So, even if there are no specific regulations, follow the previous RULE that requires an agent in any state to operate as if he were in California.  In this respect, it would not hurt to look at CIC Section 38.

"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):  "(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.

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, as mentioned earlier, 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 it is the legal and ethical duty of the agent to look at the investment sophistication of the client, as this is a rather complex product.  Sometimes the concept of variable subaccounts, in particular, 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 (ergo, ethical) 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. 

 

This has led to interesting ethical dilemmas at times, as also mentioned earlier in the example.  There are those who insist that the only ethical response is to walk away, which is a consideration. 

(This is getting just a little ahead as the fundamentals of ethics are yet to be discussed; however, the above is basic to these discussions.)

This is basic "business," but it is important, and not only as a CYA (cover your actions) safeguard.

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

 

Many states have regulations in respect to sales of annuities to Seniors that state that if an (life insurance) 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.

 

 

POLICY DETAILS AND NOTIFICATION FOR SENIOR CITIZEN ANNUITIES

 

More and more states are requiring that annuities sold to Seniors 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 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.

These are regulatory measures, but they must be pointed out directly and specifically to the annuitant.

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 it follows that 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.

ILLUSTRATIONS OF NON-GUARANTEED VALUES

Illustrations create their own particular problems and will be addressed later, however some states—California is one—that takes it another step.  When non-preprinted illustrations of non-guaranteed values on annuity contracts that are delivered or issued for delivery to senior citizens it 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 a good idea, even if it is not required by regulation.

 

 

 

SEMINARS, CLASSES, INFORMATIONAL MEETINGS

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. 

Agents and others, who market financial products, sometimes attempt to obtain new clients by holding seminars, classes or information meetings.  This is particular applicable in the Senior market and basically, where such is regulated, the regulations require that for such a meeting to be advertised (to any age) that the advertiser must disclose their intention by adding “and insurance sales presentation” immediately following the words “seminar,” “class,” or “informational meeting.” And where there are no such regulations, consider whether it is ethical to hold a "seminar" or whatever it is called, strictly for the purpose of selling an insurance product, without notifying those who are being solicited that this "seminar" is really just a sales presentation of an insurance product.  Misrepresentation, you think?  Misrepresentation is unethical, in case there is any question about it.

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 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.

WAIVERS OF SURRENDER CHARGES

 

Surrender charges have 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 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.  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 (and unethical where there are no specific regulations per se) marketing scheme used to sell annuities to senior citizens.  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 Code in the various states, such violations are administratively actionable under the Insurance Information and Privacy Protection Act (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.

 

PRETEXT INTERVIEW

The California 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."  Be informed that this regulation may not be defined as a "regulation" in another state, but the chances of a highly unethical pretext interview not being prosecuted in other states is infinitesimal. 

 

“Pretext interview” is widely considered 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.

California, for instance, takes this regulation very seriously, as do other states.  In California, 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.

MISLEADING MATERIALS

 Misleading” materials are specified advertisements that insinuate that the materials are from or associated or affiliated with a governmental agency or nonprofit or charitable organization or a senior organization.  Most states require that 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, and agent's contract almost always require that the agent receive prior approval for all advertisements.

There are certain prohibitions in the state insurance code that apply to any advertising directed at the age 65 and older market.  As a general rule, 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;
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;
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;
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;
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.
6. 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,

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; 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. 

 

USING ANNUITIES CORRECTLY AND ETHICALLY

With all of the negativism in respect to annuities, it might seem that annuities are "bad news," even for the most ethical and conscientious agent.  Such is not the case, particularly in today's market.  It is easy to scoff at and ignore the line "You can't outlive your income with annuities."  However, it is just as much a positive today as was decades earlier, however, it is more attractive to those just ready to retired or who have retired than it has been in the past.

Recently, there have been articles about the "resurrection" of the annuity in financial articles in the press, and importantly, these articles are the kind that are read by many people who have the funds to purchase annuities in anticipation of retirement.  One wells-known and well-versed financial "guru to the masses" (as he has sometimes been called) very recently used himself as a case-in-point.

He admitted that he has been married for 35 years but is not in his 60s and semi-retired, and now what is important to he and his wife financially is not really how much they have saved, but how much reliable income they can receive for life.

Typical of persons of that age bracket, at this time they have 3 sources of lifetime income:  a pension, (projected) Social Security benefits and a guaranteed minimum annuity withdrawal from a Variable Annuity.  They also, over the next ten years, will get interest and principal back from maturing fix-income investments. 

Many agents would consider him as a poor prospect as he has everything all lined up for his retirement.  Not quite.

He and his wife are looking for something to guard against inflation in the form of an immediate income annuity that would pay them a monthly income rising 3 percent a year for life.  While guarding against inflation at the present time seems like unnecessary speculation, for those who are in their 60s, they well remember when inflation was high and concern for the future was even higher. 

This writer indicated that he did not care much for income annuities—which was obvious from some of his articles in the past, in some cases strongly recommending another savings vehicle, which he accurately described in this article as "insurance products that turn our lump premium into a lifetime income stream."  Well put.

The "old" income annuity "ain't what it used to be."  They now have some attractive features, including the ability to adjust income payments based on need, payments that rise each year to counteract inflation, some access to principal and wider choices for beneficiary benefits.  He also stated what insurance companies have been saying for some time, they have lowered markups, which increases the income that the consumer receives.

What makes these plans so interesting today is the fact that people are living longer, traditional pension plans are disappearing left and right, and the Baby Boom generation are concerned about whether they will actually get Social Security when they retire. 

A recent study by University of Pennsylvania's Wharton Financial Institutions Center in a study co-sponsored by New York Life makes a strong argument for annuitizing a considerable share of the individual's retirement savings.

A Wharton Professor and an Associate Professor at Brigham Young University, recommends that you "should begin by annuitizing enough of your assets so you can provide for 100 percent of your minimum level of retirement income."

Then, they suggest that you "annuitize a significant portion," from 40 percent to 80 percent, of anything left, but they also recommend that there should be enough liquid reserves for emergencies or special wants or needs.  They maintain that retirees who do not annuitize and instead tap a diversified mutual fund portfolio to meet expenses "are subject to greater risk, often higher expenses, and returns that are unlikely to keep pace with annuity returns, especially when risk is taken into account."

Nothing in life is cast in stone and things change.  Investments may do poorly, or the person may "life too long" (remember that?), which is why many financial planners recommend withdrawing no more than 4 percent of the person's savings the first year of retirement (in other words, $4,000 for every $100,000), increasing these withdrawals by 3 percent each year.  This, obviously, takes care of inflation.

Several income annuities from top-rated companies for a $100,000 premium would pay a 65 year-old couple at least $4,800 the first year, and then increase payments by 3% per year until both spouses pass on.  If both die before getting back the $100,000, a beneficiary will get the rest.

One of these articles recently explained how insurance can do this: “Income annuities can guarantee this higher income because of the pooling of risk—premiums from people who die early subsidize those who live longer"—just in case that was a big mystery…

 

 

 

The Wharton professor was reported to have said, "By annuitizing enough money to handle your needs, you can bequeath the rest, either now or later.  If the guaranteed income covers all your lifetime needs, you may be able to donate or give money away now, while you live.

 

STUDY QUESTIONS

1.  An agent should not target the elderly for investment products and represent yourself to be a financial advisor

      A.  unless you are fully qualified as a financial advisor and acquainted with regulations.

      B.  unless you have a QFA (Qualified Financial Advisor) designation.

      C.  without having an investment attorney in your employ.

      D.  unless you are a General Agent with a large mutual life insurance company.

 

2.  Deferred annuities should not be sold

      A.  in California because regulations are too strict.

      B.  unless the annuitant needs funds fairly soon.

      C.  to persons who may an immediate need for cash.

      D.  except as a rider to a life insurance policy.

 

3.  To stay out of trouble,

      A.  never sell annuities to those who are looking for a retirement plan.

      B.  show illustrations to prospects that show very fast growth of the cash value/investment.

      C.  provide competent advice which is in the best interests of the client.

      D.  never obtain an insurance license in more than one state.

 

4.  When advertising an investment product,

      A.  it is best not to show any growth statistics as they then become engraved in stone.

      B.  make sure that the name of the agency/investment firm is misspelled.

      C.  advertising regulations can be ignored as they do not apply to insurance.

      D.  always show very aggressive growth of investments.

 

5.  An ethical dilemma

      A.  can be arrived at by concentrating only on one alternative.

      B.  is not possible with investment products.

      C.  is beyond the capacity of most humans.

      D.  must have two or more solutions.

6.  When using an illustration in a presentation, there should be (mandatory in California) a notice that

      A.  commissions are paid on the sale, and outlining the exact commissions.

      B.  this is only an illustration and is not intended to predict actual performance.

      C.  this is only an illustration, but all statistics are extremely realistic and can be expected.

      D.  all items not marked as guaranteed, are guaranteed anyway by the insurance company.

 

7.  A marketing scheme used to sell annuities to senior citizens that hides the actual business of the sales representative and hides the purpose of the solicitation is called

      A.  a pretext sale.

      B.  a living trust mill.

      C.  a seminar on real estate investing.

      D.  a ponzi scheme.

 

8.  An interview whereby a person, in an attempt to obtain information about a natural person, pretends to be someone he or she is not or is in fact representing, is called

      A.  a pretext interview.

      B.  a pretest interview.

      C.  golly-lagging.

      D.  fraud.

 

9. An advertisement, in nearly every case, but particularly in California,

      A.  must never run two days consecutively.

      B.  must state the price of the ad in the ad itself.

      C.  cannot be taken or paid for by an insurance entity.

      D.  must have prior approval by the insurance company.

 

10.  An insurance agency does not want its location known to the general public as they do not want insureds arriving at their doorstep, so they use a drop-box address in their newspaper advertising.

      A.  This is allowed as long as it is an actual address.

      B.  They are also required to list their office hours.

      C.  This is not allowed as it does not list the true address and the drop-box address is

            misleading.

      D.  This just lends credence to the idea that an agent must go to an insured, not vice versa.

 

 

ANSWERS TO STUDY QUESTIONS

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