Annuity Illustrations
Annuity Marketing, Sales Ideas, Suitability, and Issues by Michael J. Prestwich

The AnnuityLawyers.com website claims, “Annuities fraud is one of the top kinds of investment fraud scam artists practice.”

I talked to an annuity producer who sold a million dollar indexed annuity to a seventy-year old man only to have the commission reversed nine months later. The man’s son, who had heard that annuities are “bad investments,” called a local attorney to get the his father’s money back. The attorney called the insurance company and accused the producer of the following wrongdoing:

·         He did not tell the customer about the $180,000 first year surrender charge

·         He claimed the policy had an 8% guaranteed interest rate

·         He encouraged his client to sell $1,000,000 in stocks to buy the annuity

·         He did not ask the client about his investments, income, or expenses, and did not explain how the annuity would fit into the client’s overall financial plan

The producer disputed all these representations, but had little documentation to prove it.  Because the producer had such a weak case, the insurance company had little choice but to settle. The $80,000 commission charge-back nearly put this producer out of business.

The 2010 NAIC Annuity Suitability Model Regulations, which will very likely be in effect in every state by the end of the year, will make it easier for financial lawyers to threaten companies and submarine your book of business. Here’s why:

Insurers are now responsible for the supervision, training and sales practices of their agents. These lawyers will claim that the annuity producer was inadequately trained and therefore the company is responsible for an unsuitable sale. Companies will have to prove that the annuity producer was trained, and that he used sales methods or techniques not approved by the company.

These lawyers may claim that the annuity producer did not gather enough information from the consumer. Companies will have to prove that prior to making an annuity recommendation, annuity producers obtained information about the consumer’s 12 areas of suitability:

·         Age

·         Annual income

·         Financial situation and needs, including the financial resources used for the funding of the annuity

·         Financial experience

·         Financial objectives

·         Intended use of the annuity

·         Financial time horizon

·         Existing assets, including investment and life insurance holdings

·         Liquidity needs

·         Liquid net worth

·         Risk tolerance

·         Tax status

These lawyers may try to demonstrate that the annuity producer did not fully inform the consumer about all the ramifications of owning the annuity product. Companies will have to be able to prove that the annuity producer informed the consumer of:

·         the features of the annuity

·         the potential surrender period and surrender charge

·         potential tax penalty if the consumer sells, exchanges, surrenders or annuitizes the annuity

·         mortality and expense fees

·         investment advisory fees

·         charges for and features of riders

·         limitations on interest returns

·         insurance and investment components

·         market risk

The 2010 NAIC Annuity Suitability Model Regulations require companies to set up a special suitability approval department, similar to a life insurance underwriting department, which will examine each sale to ensure that the agent used suitable methods and sales practices. The purpose of this department is to gather information and to determine whether the annuity sale could be defended against those who may try to attack it.

Since it is now clear that the insurance company is always responsible for the product issued, they are now putting in place systems, standards, and training to protect their business. In the future an annuity sale will resemble a life insurance sale in that customers will have to qualify before their annuity application will be accepted. Annuity producers who are not willing or able to provide the necessary documentation to defend the fixed annuity industry against lawyers such as those listed in AnnuityLawyers.com, will find many of their annuity applications denied by the company, and may ultimately be forced out of the fixed annuity business.

Here is what you can do to succeed in today’s litigious environment:

·         Join and NAFA and learn about product suitability, advertising guidelines, and to educate yourself so you can represent yourself as an annuity professional.

·         Use software such as ImagiSOFT’s DataNet to prove that you have gathered information about the consumer’s 12 areas of suitability, disclosed the features of each annuity that you sold, and have documented every step of the sale.

·         Use company-approved advertising materials, illustrations, and disclosures.

·         Keep the recording of a five-minute summary interview with your client where you discuss the purpose of the annuity, the source of funds, the advantages of purchasing the annuity, the potential disadvantages such as surrender charges, the timeframe for the product, and the financial problem this product solves for your client.

·         Discuss the annuity with the beneficiaries. Explain probate, settlement options, and potential tax implications.

·         Let your customers know that you keep detailed records and to call you for a review if they have any questions about any of their annuity products.

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This entry was posted on Thursday, May 13th, 2010 at 1:51 pm and is filed under NAFA, Suitability. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.