Chapter 1
A Legal Danger
Introduction to This Course
Hello. My name is Harry Bobs. I will be your narrator for this course. I have been an agent for more years than I care to remember. I am not an English professor. If you feel I didnt put the period in the right spot there is no need to tell me about it. If you are noticing the periods and comas then you arent concentrating on whats important the information provided. The information in this course comes from multiple sources. Some I agree with, some I dont. I still include what I disagree with since every persons point of view deserves to be looked at. While I am not the dumbest agent youll ever meet I dont know everything. There is a point to that statement: no agent knows everything. If you think you do, then you are a danger to the consumer because your mind will be closed to new ideas, new ways of utilizing insurance products, and (most importantly) what you may be doing incorrectly due to lack of information or experience.
I will be talking in terms of the male gender. I fully realize that many successful women are in this business, but it is just easier to leave out the his and hers, himself or herself, and so forth. Sometimes, due to the computers determination, you will see such references, but they are not mine. I always go for simplicity. I love computers: they correct my shortcomings. Unfortunately it doesnt always realize that I meant to say that rather than hat. I will try to catch such errors, but if I miss some, please dont dwell on it. If you wish to bring mistakes to our attention we will certainly thank you and make the correction, but it should never become your main focus. Again, if you are focusing on such errors you are missing the course content.
I am not asking that you agree with everything in this course. In fact, it will please me if you dont. Much to do with selling insurance is personal preference and personal opinion. That is obvious from the huge quantity of books on the subject. What is also obvious is that there seems to be two very distinct sides to insurance: those who are for it and those who are against it. Make no mistake that those who oppose insurance are for something (it just doesnt happen to be insurance products). They might be for saving cash rather than paying premiums, they might be for trusts rather than policies, but whatever it happens to be they have some type of financial stake in their point of view. If nothing else, their stake is selling books to those interested in their point of view. If you learn nothing else from this course learn this: since no individual knows everything you must be willing to listen to everyone but do not take anything at face value. Do your own research and trust your own instincts. Of course, at all times you must follow the law.
Speaking of the law, this course was mandated by Section 1749.8 of the California Insurance Code that took effect on January 1, 2005. This law states that life agents who sell annuity products must first complete eight hours of annuity training (course content is specifically mandated by the state), followed by four hours of CDI approved annuity training every license renewal period thereafter. If you need the initial eight hours of annuity education STOP! You have the wrong course. Call the course provider and request the eight-hour course. If you have previously completed an eight-hour course, continue on.
I have included this chapter and chosen to put it before all else because I find that many agents do not take their legal requirements seriously enough. Especially new agents seem to think that as long as they try their best they do not face any legal liability. I also find that many recruiters spend more time training how to get sales than how to fully represent the products. Of course recruiters have to be successful if they want to keep their own jobs, but too many new agents lack full knowledge of their liability and the marketplace. California is trying to correct this through legislation and that will help, but it may not be enough if those who train agents do not sufficiently perform their job. Therefore, this chapter addresses the reasons agents must become personally responsible for their own awareness of the marketplace, the liability they face when their actions are less than desirable or insufficient, and the results they may face for their shortcomings. It is not my intention to scare agents out of the profession. It is my intention to fully educate them on the repercussions, including lawsuits, if they fail to adequately perform their job.
The Dangers of Selling Insurance
Since I am older than rocks I have seen just about everything there is to see in the insurance selling field. Some of the stories youll hear are true others arent. Probably every agent has heard the story by recruiters about an agent who did so well he put a chandelier in his barn (even a novice should know that isnt true). There is one truth that isnt told: selling insurance presents a legal danger. Statistically even good honest agents have the potential of being sued every ten years (financial planners face an even higher probability). Some types of insurance, such as long-term care and annuities, have a higher danger of lawsuit than those who sell other types of coverage. Every agent can minimize the danger by following good business practices, providing full disclosure, and documenting all conversations and recommendations.
There are some basic facts that every agent should know:
1. Selling insurance is hard work. Despite what your recruiter told you, people are not hanging out their windows waiting for you.
2. You must spend time learning your products and how they fit in the marketplace and in a clients portfolio. You cannot simply read the product brochure and be an adequate advisor or salesperson.
3. There is lots (and I do mean lots) of competition. It doesnt matter what you sell, someone else is also selling it.
4. There is a huge turnover in licensed agents. There may be many reasons for a person leaving the industry, but Ill bet the main reason is lack of earnings. If an individual does not earn enough to achieve a reasonable standard of living he will leave the selling field in search of an hourly wage. Any commissioned job is difficult; if it were easy, everyone would be doing it.
5. If you dont provide customer service, the guy who replaces your business will promise to. Note the word promise. There is no guarantee that he will actually do so.
6. Insurance companies are not the only entities that face the danger of lawsuits. It doesnt matter how honest you feel you are, if someone loses money, they may think it is your fault (and sometimes the client is right it is your fault).
7. Insurers that are not highly rated by industry standards lack that rating for a reason. I have heard recruiters minimize the risk of lower financial company ratings, but they do so for a reason: to get you to sell their products.
8. When insurer recruiters promise a product will to do everything except milk the family cow get a copy of the actual product and read it. No product does everything. All have limitations, exclusions, and exceptions.
9. If the product pays a higher commission than other similar products, there is a reason why. The insurer is probably charging the policyowner higher fees or somehow making more money. The insurer is going to push those products that earn them the most. All types of businesses advertise that which brings in the most earnings but when it comes to annuities, those higher fees equate to lower monthly income for your clients.
10. Never completely trust product recruiters. Their job is to sell you! Why? So you will sell the product producing an income for the recruiter and the insurance company. I am not saying this is wrong. Who would sell insurance if there were no commission? I certainly wouldnt. I deserve to earn a living just as much as the plumber charging me $50 an hour. Even so, it is your job to be aware of recruitment tactics.
11. Always carry Errors & Omissions insurance, even if you are always totally and completely honest. Additionally be aware that E&O liability coverage covers only those products related to the insurance industry. It will not cover mistakes made selling living trusts, for example.
12. Wake up every morning and assess yourself. If you ever find that you no longer enjoy selling insurance, leave the profession. More consumer damage is done by out to lunch agents than by dishonest ones.
Following the Rules
Field agents are primarily self-employed. The insurer has no way to effectively monitor their actions. Even captive agents (those who work for a single company by contract) cannot be monitored well. Insurers face legal worries as a result of this. With the large turnover of agents, insurers routinely pay the costs of a dishonest or under-educated agent who is no longer licensed with them. What agents may not realize is that they are still in legal danger even if they let their insurance license lapse. The people you advised have the right to sue you for your mistakes, whether you are still a licensed agent or not.
Any agent who doubts there is danger in selling annuities should go online, enter annuities in the search box, and see what comes up. Among the hundreds of annuity advertisements are ads from attorneys seeking clients. One attorney advertised that he could obtain any losses from variable annuities from the agent who sold them even if that agent is no longer licensed. All the attorney advertisements blame the selling agent or insurer for any losses or unforeseen consequences of the annuity sale. It doesnt even matter whether or not the attorney can succeed since the selling agent will have to defend himself. That will mean attorney fees, lost time, and certainly stress.
If you search out legal education you will find classes available to lawyers on how to sue agents and their insurance companies. As lawyers become more plentiful they must find new professionals to earn a living from and you guessed it: that puts agents and financial planners in a higher risk group.
How does an honest agent protect himself from the possibility of a lawsuit? There is no sure-fire method, but there are certain things that the prudent agent can do to minimize the danger. Obviously, it pays to be honest, but I am going to assume that the reader is such a person. Beyond that:
Be a good communicator. President Reagan was known as the Great Communicator because he was so skilled at talking with others. One would think that any person who rose to the rank of President would be skilled at communication, so why was Ronald Reagan regarded as especially skilled? I believe it was actually his listening skills that made him appear extraordinary. It can be surprisingly difficult to actually listen to and comprehend what another is saying. Our spouses can probably relate to this. We may nod as though we are listening, but not be able to state back what was actually said. The ability to listen is important in most industries but especially important in ours. We must be able to repeat what was said in order to understand what our clients want or need. Understanding their fears, goals, and current situation is how we figure out which products meet their needs.
Once we know what our clients (and spouse or significant other for that matter) said, then we must be able to effectively respond. Listening, then speaking is a valuable asset. Its too bad so few of us have successfully mastered it. Most of us just want to talk.
Know your products before you attempt to sell them. I know every agent has heard this, but many do not even read an actual policy prior to marketing it. When I first came into the insurance industry thirty-plus years ago my recruiter tossed me some industry product brochures, a few lead cards and sent me out the door. It was up to me to go home, read them, and suddenly become an expert on insurance products. Today most companies arent that bad because the threat of lawsuits is too great. Even so, it is not unusual for agencies to offer little in the way of product education. When education is provided it often is aimed at how to sell the product rather than the provisions contained in it. This is not always the case, of course. There are agencies that do an excellent job in the training they offer.
Ultimately it is always the responsibility of the agent to learn their products. Whether or not your agency offers training, you are legally and morally responsible to know the products you are selling. I recommend that every agent:
1. Obtain and read an actual policy. Insurance companies will send you a specimen policy upon request. Brochures will provide valuable information, but only the policy will provide details. Lawsuits are born from the details.
2. Attend any and all agency meetings on products. Even if the meeting is a product promotion, you are bound to learn something.
3. Cultivate friends in the insurance field. Because insurance is a commission industry we often believe that competition and friendship do not mix. Nothing could be further from the truth. You need friends in the industry. It allows you to talk to others, get their perspectives, and argue your differing opinions. Even when you disagree on the details, it is very important that you listen to their perspectives. It is these kinds of discussions that will make that light bulb suddenly go on, giving you new knowledge or a new way of viewing an opportunity or product.
4. Read everything (and I do mean everything) that you can from your states insurance department. Even regulations that initially may seem confusing or boring are important since they keep you up to date on new legislation, pending legislation, product problems, and industry changes.
5. Read everything (and, again, I do mean everything) that comes from the insurance companies, even when it is on a product you are not selling. Many state law changes will first come across your desk from one of the insurance companies you are licensed with. Most insurers do a very good job of letting their agents know of pending law changes.
Knowing your products is only the first step. Once you completely understand the products, you must be able to relay the information to the consumers in a way they can understand. Since Ronnie is not available to communicate for you, you must be able to explain how a policy fits, the benefits it provides, and policy exclusions or exceptions in a way the average person can absorb and understand. Many consumers will appear to understand when they do not. Who wants to appear stupid? Of course, no agent wants to offend their clients, but it is easy to say something like: I know insurance is a difficult topic, even for many agents. What do you find confusing about the policy we discussed? Although you are assuming they are confused about some element of your insurance discussion, it allows an individual to admit confusion without feeling inadequate.
I always had a standard ending to a policy explanation: Every time I take my car in for maintenance the mechanic wants to explain all the little engine parts to me. I act like I know what hes saying, but to be honest, its all Greek to me. I dont work on cars, I dont understand them, and frankly, I dont want to learn about them. So I just nod like Im one of the mechanic guys. If you feel this way about insurance let me know now. It will save both of us a lot of time and I can zero in on what you need to know without boring the socks off you. You would be surprised how many people let out a sigh of relief and tell me that they did not understand a single thing we talked about. It is important that I know this because it allows me to stress such components as exceptions or particular aspects that I know they need to understand while bypassing elements that are not likely to affect the client.
I do not want anyone to believe (or think that I believe) full disclosure is not important it is. If you are working with an elderly client who confesses that they do not understand what you are talking about I would certainly recommend that you suggest one of their children or grandchildren join you. This suggestion can be made without offending your client. Simply say: Many of my clients prefer that a second person be here (or third if you are talking to a couple). That way there is an extra ear so later on you can discuss the product without forgetting something important. Also they may think of a question to ask that you and I didnt consider at the time.
The Misunderstood Product
Often the complaints lodged against annuity products seem out of place, since they focus on aspects that specifically define the annuity, such as duration of investment (surrender penalties). We could assume that the agent did not fully explain the product, but it is also likely that the complaints come from family members that were not present during the product presentation. The surrender charge especially seems to be an element of concern for those who like to hear themselves advise others. Annuities are a long-term investment; they are designed to be such. That is why surrender penalties exist: to make investors think twice about canceling them. Yes, some annuity products have an excessive surrender period, but the first annuity products had one for the duration of the annuitys life, so by that standard, todays arent too bad. Annuitization is specifically designed to give a lifetime income, in which case the surrender period would not even apply. With few exceptions, annuities are not (and never were) designed for short-term use. It is important to recognize that those who are against annuities are nearly always for something else. Since there is no financial product that will satisfy everyone, it is necessary to filter out the nonsense complaints.
While agents want to select products that are consumer friendly, ALL financial products are designed to achieve two things: (1) investor return and (2) company profit. No one expects Walmart to sell their products at cost; we realize that they could not hire a staff, pay utilities, or continue operating if they never made a profit. I find it interesting that the attorneys who are hungry to sue agents would never consider doing so for free. It is ironic that the attorneys who shout their desire to protect the consumer will take one-third to one-half of the proceeds if they win. What would consumer reaction be if insurance products routinely took half of their investment? Financial advisors believe more than two percent expense levels are high on variable annuities, yet consumers and state authorities accept attorneys being paid a third to half of court winnings. Why do consumers accept an attorney taking such a chuck of their money, yet expect their insurance agent to perform their duties without pay? Part of this attitude comes people telling our clients that we are overpaid (these advisors, on the other hand, are not overpaid and for a fee will gladly help the hapless annuity buyer). While there are agents who make an exceptional income due to the many hours they have invested, it is much more common to see the agent who lives from commission payment to commission payment just like most people in our communities. Those of my age remember the old television series Father Knows Best. Robert Young, who played the father, was a life insurance agent in the show. Today it is unlikely that the hero would be cast as such.
Whether or not we agree with the views aggressively pursued by those with a financial interest in downgrading the industry, we must admit that some of the adverse views are the direct result of industry ignorance, lack of training, and often lack of appropriate consumer education. If every agent would specifically tell their clients that no financial product, from Certificates of Deposit to annuities, are going to achieve every life goal we might be able to divert some of these problems. An annuity is simply a financial vehicle set up to achieve specific financial goals. If the individuals goals do not fit the parameters of the annuity product, they should not purchase one. It is that simple.
What happens when individuals (especially elderly individuals) think their goals do meet the parameters of the annuity, but their children disagree? An article titled Whos Preying on Your Grandparents by Securities attorneys are hoping to bring in clients based on the views of the younger generations, even though the grandparents may be very happy with their selection of financial vehicles. Such articles often prey on the fears we have about our older relatives and their ability to make sound judgments. It is unlikely that the same attorneys would label a similar financial article Whos Preying on Your Children? Our culture thinks the young are able to makes financial decisions without help, but we do not give the same respect to our parents and grandparents. Of course, it is important to recognize when physical or mental ailments make sound judgments unlikely.
An article by the same Securities Attorneys made an interesting statement: Many investors dont understand or take into consideration that brokers are paid for selling annuities. It is hard to believe that anyone would think we work without compensation. The attorneys stating this are certainly paid (paid much better than the writing agent, in fact); those who work with the various state agencies receive compensation; only the outstanding individuals who volunteer their time at hospitals, social agencies, and animal welfare groups work without compensation. EVERYONE ELSE RECEIVES PAYMENT FOR THEIR WORK.
The potential for lawsuits emphasizes the need to strictly follow state guidelines and to document every conversation with clients. Agents can no longer afford to be sloppy with their paperwork. If possible, conversations should not only be documented, but also signed or initialed by the clients. It is important to realize that it is often not the clients that sue their agents and insurers, but rather their heirs. Having proof of proper behavior will not prevent the lawsuit from being filed, but it will protect the agents financial outcome.
There is legal danger for anyone who works with the public and their money. How do you prevent your good intentions from landing you in court? Only through diligent work habits, including extensive documentation, knowledge of state and federal laws, and good communication skills. Even then, you may be sued, but if that happens you can bring protective documentation to court with you. You may even avoid the lawsuit entirely by presenting what you have to those wishing to file the suit.
I cant imagine anyone not wanting to live a long time into retirement. I also cannot imagine anyone not wanting sufficient income during that life. Most of us will live longer than our parents did. The average 65-year old will live an additional 17.8 years, with many living longer than that.[1] As Americans continue to live longer into retirement many of them do not have as much money as they have life. As a result children and grandchildren must make up financial differences for their aging parents and grandparents. Certainly that is not our intent when we retire.
As we witnessed the stock market once again remind us that what goes up can also go down, annuities were again a favorite refuge. Their popularity seems to go up and down with the stock market but they have always been the same stable (though unglamorous) financial vehicle. Yes, they are part of the insurance industry. Yes, that means that those who oppose insurance in nearly any form will continue to stomp on them. Sandra Block in USA Today called annuities the do-it-yourself pension plan for individuals who might otherwise not have one.
It is true that those who purchase an annuity are giving money to an insurance company and this seems to be what all the fuss is about. Those who oppose insurance insist that any money given to an insurance company cant be a good thing. The fact is, however, that insurers tend to be the soundest institutions around despite those in the news that have ended up in insolvency (which points out the need to seek out solid companies). When we give an insurer that chunk of money we receive the ability to receive a lifetime income something that many retirees lack at age 65. Of course, the length of time we receive these funds will depend upon the annuitization option we select, but a lifetime income is usually the goal. How much is received each month will directly reflect the amount of money that is deposited, life expectancy (with women expected to live longer than men) and the rate of return (interest).
While most states are putting through continuous legislation on insurance products (the insurance industry is the most regulated of all industries in the United States) it is competition that has brought about most of the consumer-oriented products. Just as Walmart and Target continue to offer better prices in their competition with each other, insurers continue to offer better products in order to compete. This has led to more choices in immediate annuities and lower expenses. Consumers need to realize that the insurers still need to make a profit, however. No company can exist without a profit margin. In addition, we want them to make a profit so they will continue to be in business in 30 or 40 years and be able to continue making that monthly payment to us. Even though I am completely in favor of annuities I would never put all of my own money into them. Just as I would never want to eat steak seven days a week I would not want to commit all of my money to one financial vehicle of any kind.
Since each agent should do for their clients what they would do for themselves, it is important that each agent consider what they are doing for their own retirement. If you are not saving for your own retirement how can you advise your clients to do so?
Before you buy an annuity for yourself (or advise your clients to do so) I would recommend that you:
1. Recognize that all of your money should not be in an annuity. I am probably one of the biggest supporters of annuities, but I do not have all of my funds in them. While there will be differences of opinion, most professionals say between 40 and 60 percent can safely be put into annuities (with the goal of lifetime annuitization). Since annuitization locks in a monthly income amount, there is the need to also have funds in a vehicle that will offset inflation. Inflation is the main negative element of an annuitized annuity. My annuities are not yet annuitized so I can save in them without worry of inflation but once annuitized I must consider this.
2. Recognize that annuities have surrender fees. My annuities are not for current needs; they are for retirement. As a result, the surrender fees are not important to me. However, these fees have been so highly publicized that most consumers know they are supposed to ask and worry about them. Yes, they should be considered, but only as an overall feature of the annuity not as the main component of them. Personally, I consider the financial strength of the insurer to be the main focus, with everything else falling in line behind that. It is not uncommon for a sound annuity to have a ten-year surrender period. When there are annuities with much shorter times why would an insurer select such a high one? There are many reasons, which is why it is important to look at all the annuity features without focusing on one specific element above all else. If the longer surrender period allows the company to pay higher commissions then the goals of the annuity are not compatible with my goals. On the other hand, if the longer period allows the annuity to pay a higher interest rate then it is one I will purchase. It should come as no surprise that different annuities invest in different vehicles. Some investments require longer commitments than others. Longer investment commitments will require longer surrender penalties. This is not hard to explain to consumers.
3. Many annuitization options will not pay anything to beneficiaries, even if you die before using all of your investment funds. This is not unique to annuities. Pension plans will only pay to either the employee or to the employee and his legal spouse (depending upon payout selection). Children do not expect to inherit from the companys pension plan, yet they will immediately hire an attorney when their parents retirement annuity does not hand over funds to them. It is possible to select payout options that will pass funds on to beneficiaries but if they are selected the annuitant will receive less themselves in many cases. If the annuity is designed for retirement, it is no different than a company pension plan. This should be discussed not only with your clients, but also with their potential heirs. It is important that all of them understand when an annuity is designed for retirement not beneficiary payment.
4. If your client is married, he should consider a joint-and-last-survivor annuity so that both people are covered by it. This type of annuity will pay a lifetime income for both parties, just as a pension plan through work would do under such a selection. Such an annuity will pay less per month for two people than it would have for one since it is insuring the life of two people instead of one.
5. Annuitized annuities do not withstand inflation well. Yes, you can purchase one with an inflation component to it, but they are seldom good buys. It would be better to buy an annuity without an inflation guard and put a portion of money into something that will offset inflation. Bonds are often recommended for this. Annuitized annuities pay a fixed monthly income that will not change even if the cost of living increases dramatically.
6. If inflation is a great worry for your client, it is possible to purchase variable immediate annuities, which link their returns to the performance of stock mutual funds. It is important to recognize that this means a higher level of risk for the investor. Many retirees are not in a position to withstand higher levels of risk. During a stock market downturn, your client could experience a plunge in income. This MUST be explained and explained again at the time of purchase. It might be better to purchase two annuities: one fixed and one variable.
7. No matter what anyone tells you, there ARE fees in annuities. When an immediate annuity is purchased the buyer pays a mortality and expense fee to the insurance company. There will also be an investment management fee to cover the cost of managing the underlying investments and you may pay an annual account maintenance fee. Agents often do not disclose these fees figuring the client wont be able to spot them anyway (which is mostly true). I do not believe that most people think we work for free, nor do I believe they think the insurers have no desire to make a profit. People know fees are likely to be included even if they are not sure what they are or how they are paid. The average fee for an immediate variable annuity is 2.12% versus 1.4% for a stock mutual fund.[2] Fixed annuities are less expensive because, like bond funds, they cost less to manage. Different annuities will charge different fees so it pays to shop around.
I favor annuities so some of the aspects of these investments I do not consider a negative (such as the surrender fees because my annuities are for retirement). I have made arrangements for my beneficiaries so, again, I do not consider the lifetime income annuitization option a disadvantage. My children would not receive anything from a company pension if I had one (I dont) so why should they feel they need something from the annuity I purchased as a pension for myself?
It most certainly is possible to plan well for retirement without an annuity. Those who adamantly oppose insurance do not have to buy an annuity to end up secure in retirement. If they plan well, do not spend funds that are set aside for retirement, and have correctly assessed how long they will live, any type of savings vehicle will do the job. However, for those who may not be able to keep their hands out of the retirement cookie jar, are risk-averse, and are not sure they can determine how long their money must last an annuity is an ideal choice. If an annuity is selected be sure you provide companies that are highly rated financially. A less than top-notch company is always a poor choice for an annuity that must continue to be secure for decades.
Errors & Omissions Insurance (E&O)
Many insurers now require their agents to carry E&O insurance. It protects the insurer as well as the agent since it demonstrates the attempt at responsibility. Doctors and those attorneys who want to sue us would not consider practicing their trade without professional liability insurance, but agents and financial planners routinely fail to recognize the importance of liability protection. When an agent or planner chooses not to purchase E&O insurance, it is called going bare. It is not always easy to acquire E&O insurance and the type that is desired may not be available. Some insurers provide access to a group policy; if one is available agents should purchase it since the cost is likely to be less than for an individual policy.
Consumers are more aware than ever before of their legal rights. Consumers (and their families) are more likely to sue today than ten or twenty years ago. Not only have attorneys become better educated when it comes to suing agents and their companies; people are also more accepting of such lawsuits. The 1970s saw the beginning of the trend to sue professionals for negligence or malpractice. For agents, negligence is the number one reason a lawsuit is filed, according to Cheryl Toman-Cubbage, who worked in the insurance legal field as a specialist in professional malpractice defense at a large law firm. Eugene Kennedy wrote in his article The Looming 80s in a December 1979 issue of the New York Times Magazine: The courts, as perhaps the last institutions with authority intact, became the instruments for displacing blame, some real and some imagined, onto third parties. We have become a nation of blaming others for our decisions and our disappointments. Why should the insurance field be excluded from this trend? He went on to say that everything from doctors to schools are being sued when life does not seem fair or proportionate. If your child failed to study and complete his homework it must be the schools fault. If Uncle Charlie is injured while breaking into someones home, it must be the homeowners fault. If a clients variable annuity did not produce as desired, it must be the selling agents fault.
I am not saying that it is never the schools fault, the homeowners fault, or the agents fault. When it is the fault of the school, homeowner, or agent a liability policy is suddenly not so expensive after all. Even the most well meaning agent can be guilty of an error or omission (which is why a responsible agent carries liability insurance, called Errors & Omissions insurance).
In the 1970s the scope of the term professional was broadened to include insurance agents. While this gave agents additional status, it came at a price. At this point, we became the focus of attorneys looking for new financial opportunities, along with architects, engineers, accountants, stockbrokers, and others who were suddenly deemed professionals.
While agents may grumble about having to take mandated education the states are actually benefiting them with education requirements. While the true professional will always seek out education, with or without state mandates, there are many agents who would not do so. When the states mandate education they are forcing those who would not otherwise do so to obtain education. Hopefully it will also eliminate those agents who have so little respect for the profession that they would rather let their license lapse than obtain education.
One of the greatest consumer dangers is the agent who believes they know everything. Any person in any profession that believes they are so smart that there is nothing new to learn is a problem. Imagine the surgeon who doesnt want to learn anything new or the mechanic who sees no reason to learn new technology. You and I would never consider using a doctor who saw no need to continually learn. Why would our clients want an agent who has no desire to keep updating their skills?
Agent Liability
There are areas in which an insurance agent has specific liability. If an insurance agent is also a financial planner there exists a serious conflict of interest in any insurance transaction. A financial planner may want to consider selling no products, offering only advice on which products may be effective for the client. Unlike the accountant who becomes a financial planner (selling only his services), the insurance agent who becomes a financial planner, but continues to also sell products, imposes a great liability on himself. Agents who bill themselves as a financial planner must always put the client first, even if that means losing an insurance sale. Certainly liability exists for the agent who does not also call themselves financial planners, but that liability is especially high when both advice and policies are mixed into the same transaction. In all cases, a financial planners role is to provide direction and advice. Never should the financial planner focus on selling products.
Example: Sally Salesman has had business cards printed that proclaim her to be a financial planner and insurance agent. Both are clearly stated and she hands these cards out (as she is required to) at the beginning of each sales presentation. Sally does not specifically say she is a financial planner but obviously the clients she presents products to read her business card. Because she presents the clients with a card that states she is a financial planner she is automatically held to a higher ethical and legal standard than she would be if she were only representing herself as an insurance salesperson.
An agent whose sole function is the sale of products has less legal liability than the agent who is functioning in both planning and sales. Even so, agent liability does still exist. Agents can be found liable for negligence, violation of state statute, or breach of contract. Statistically, negligence is the most common reason for lawsuit. This is not surprising since many lawsuits develop from loss of financial status. In an annuity, this equates to insurer penalties or loss of investment earnings. Surprisingly, according to Professional Liability Pitfalls for Financial Planners, by Cheryl Toman-Cubbage, the most typical reason for a lawsuit is the failure on the part of the agent to place necessary insurance. Agents often hear that we over-sell our clients, so it would be reasonable to think that most lawsuits result for other reasons not the failure to sell a product. Of course, this statistic is considering all areas of insurance, not just annuity sales. Lawsuits also come from giving unauthorized instructions or unauthorized interpretations of coverage, delaying the underwriting or claim information, failure to fully disclose (such as the length of surrender penalties), or the failure to fully disclose the risks involved in some types of annuities.
Considering the vast array of actions for which an insurance agent or broker may be held accountable an agent who is not practicing proper and legal sales practices is putting themselves in great legal danger. It should be noted that it is not always the clients who sue agents; insurers may also sue an individual for failure to follow required insurer procedures.
What sloppy agents may fail to realize is the fact that they are also putting their family at legal risk. Suppose Joe is an agent who places little importance on performing his job adequately. His wife, Anne, is not an agent but she works and earns an income. If Joe is sued it may affect their household income, not just his income. In that case, Annes income and the lifestyle they enjoy will be affected by his lack of responsibility.
There is an important legal distinction between an agent and broker. In most cases, agents are considered to be representatives of the insurance company, while brokers are considered representatives of the insured. This means that a brokers primary allegiance is to the client while the agents primary allegiance is to the company for which they write insurance. Knowledge of the broker is not considered to necessarily be knowledge of the insurer. An agent, on the other hand, is considered to have the same knowledge as the insurance company for which they write business.
This distinction can be critical if an insured sues both parties: the agent (or broker) and the insurance company issuing the annuity. Often, if a broker is involved, the insurance company can escape liability. If the lawsuit is against the agent, the insurance company can still be held liable even if the agent acted inappropriately, or oversteped his express authority. Express authority refers to the powers allowed an agent in the agency agreement held with the insurer. An agent also has what is termed implied powers. Implied powers are those which an individual could reasonably believe the agent has. This is usually referred to as ostensible authority. Clients have no way of knowing which rights the agent has, so if the agent writes a policy that should not be written the courts will side with the client, since he or she could not have known the agent was taking legal liberties that were not his to take. When this happens you can be certain that the insurer will file legal remedies against the offending agent to recover their losses.
Statutory Violations
Obviously, agents and brokers are required to follow the laws. Agents may be found liable for statutory violations, both civil and criminal. Criminal violations can require a fine, imprisonment, or both, depending on the severity of the crime. In some cases, if the agent surrenders his insurance license, no further criminal action may be taken, but this often depends upon the offense.
The most common crime committed by insurance agents is fraud.[3] Fraud can include many things, including failure to turn premiums over to the insurer (which meant no policy existed), putting premiums into personal accounts rather than trust accounts, misrepresentation of policies, or other fraudulent actions. States have the option of pursuing criminal punishment or merely removal of the agents ability to sell future policies. Unlike some states that appear to have little interest in pursuing criminal penalties against agents, California has taken a hard line on those who knowingly break the law.
Bottom line: obtaining a few extra dollars is never worth your livelihood and reputation. Since you must complete this course if you wish to market annuities, spend enough time to learn something. This is your job; it deserves to be given some priority.
End of Chapter One