Any business must advertise to prosper and insurance is no
exception. There are rules and regulations
regarding how advertising may be done.
Advertisements designed to produce leads from a direct response
mail piece, which is directed toward consumers age 65 or older, must
prominently disclose that an agent will contact them if that is the case. When the agent makes contact, he or she must
disclose the fact that they are there as a result of the mailing.
It is illegal to purposely mislead consumers. This would include the use of names so
similar to well-known names that it would be likely to mislead the
consumer. This would include the use of
symbols, initials, or other items that could be assumed to represent a
governmental agency, charitable group, or senior organization. Advertisements may not use the name of any
state or political subdivision of the state in a policy name or
description. The Social Security
Administration does not advertise for insurance companies or insurance products
and no advertisement may imply they do.
Anyone representing insurance products must truthfully represent who
they are and the companies they represent.
In short, no advertisement may be printed, including business
cards or stationary, to look like a government agency, nonprofit charitable
group, or senior organization.
Advertisements include the use of envelopes, stationery, business
cards, and any other material designed for the use of promotion of
products. Business cards and other
forms of stationary that are used in relation to the sale of insurance products
must have the word insurance on them as well as the agents license number.
If an agent wishes to advertise a product they must first receive
written permission from the insurer.
Agents also may not imply in their advertisements that any particular class
or occupational class are entitled to reduced rates on a group or individual
basis unless it is actually true.
Some terms cannot be used at all in advertisements. These include the words seminar, class,
informational meeting, or substantially equivalent terms to describe public
gatherings whose propose is the sale or promotion of insurance products unless
they also add the words and insurance sales presentation immediately
following the terms in the same type size and font.
Californias insurance commissioner has the administrative
authority to assess penalties against insurers, brokers, agents, and other
entities engaged in insurance for violations they commit. Penalties may also be levied in civil court.
After a public hearing, if the commissioner feels a violation has
occurred, a notice of hearing must be served upon the individual or entity that
committed the violation. The notice
will state the violation committed, the time and place of the hearing, and the
commissioners intend to levy penalties.
The hearing must be scheduled within 30 days of the notice. Within 30 days of the hearing, the
commissioner must issue the order specifying the amount of the penalties
levied. Any penalties collected will be
deposited into the Insurance Fund.
The Insurance Commissioner is not the only person who may levy
penalties. Actions requiring the party
to discontinue specified actions, penalties specified by law, damages, restitution,
and other legal remedies may be brought in superior court by the Attorney
General, district attorney, or city attorney on behalf of the people of
California. The courts will award
reasonable attorneys fees and court costs to the prevailing plaintiff who
established the violation.
Penalties
Except for insurers, any person or entity that engages in
insurance that violates the requirements of California is liable for an
administrative penalty for a first offense of $1,000. A second or more offense will be penalized no less than $5,000
for each violation. It can be more than
that, though not over $50,000 for each violation.
If the commissioner brings an action against a licensee and
determines that his or her actions may reasonably be expected to cause
significant harm to seniors, the agents license can be suspended pending the
outcome of the hearing.
An insurer who violates California law is liable for an
administrative penalty of $10,000 for the first violation. An insurer who violates California law with
a frequency that indicates a general business practice is liable for an
administrative penalty of no less than $30,000 and no more than $300,000 for
each violation. In addition, the
commissioner may require rescission of any contract found to have been
marketed, offered, or issued in violation of California law.
While an annuity works well for many senior Americans, there are
times that it is not appropriate.
California Insurance Code 789.9 states some specific prohibited sales
practices:
1. An annuity may not be sold if the reason for
purchasing it is to affect Medi-Cal eligibility when the purchasers assets are
equal to or less than the community spouse resource allowance established
annually by the California Department of Health Services pursuant to the
Medi-Cal Act.
2. An annuity may not be sold if the reason for
purchasing it is to affect Medi-Cal eligibility and the senior would otherwise
qualify for Medi-cal without purchasing it.
3. An annuity may not be sold if the seniors purpose
in purchasing the annuity is to affect Medi-Cal eligibility and, after the
purchase, the senior or their spouse would still not qualify. If a fixed-rate annuity is issued, the
issuer must rescind the contract and refund all premiums, fees, and interest
earned under the terms of the contract without imposing surrender fees. This is in addition to any other remedies
that might be imposed.
Insurance products are generally sold in the investors
home. While investors do sometimes go
to the agents office, it is more likely that he or she will be in his or her
own home. The agent must deliver a
written notice of their intent to come no less than 24 hours prior to the
in-home meeting. If the senior has an
existing insurance relationship with the agent and requests the meeting at
their home, the agent must still deliver a written notice prior to the
meeting. If he or she comes to their
clients home the same day the meeting is requested, the notice may be handed
to the client upon arriving.
The content of the notice must be in 14-point type and contain
substantially the following with the appropriate information inserted:
(1) During this visit or a
follow-up 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).
Upon arriving at the seniors
home, the agent must state that the purpose of the contact is to talk about
insurance, or to gather information for a follow-up visit to sell insurance, if
that is the case. The only thing that
may precede this statement is a greeting.
No questions may be asked until this statement is made. No other statement may be made. It might go something like this: Hello
Mrs. Roberts. My name is Samantha
Smith. My purpose today is to talk with
you about your insurance needs. Do you
recall receiving the notice I delivered yesterday regarding this?
The agent must further
disclose the name and titles of any persons arriving at the seniors home with
her. She must state the name of the
insurer that will be represented, if known prior to the presentation. Each person arriving at the seniors home
must present her with his or her business card or some type of written
identification that states the persons name, business address, telephone
number, and any insurance license number.
At any time if the senior requests that the agent leave, he or
she must immediately do so, without further discussion or continued
persuasion. It is absolutely illegal to
solicit a sale or an order for the sale of an annuity or life insurance product
at the residence of a senior, whether in person or by telephone, by using any
type of scheme or ruse that misrepresents the true purpose of the contact.
Although this has been previously stated, it should again be
noted, that the term senior refers
to an individual who is 60 years of age or more.
Sharing
Commissions With Attorneys
An agent, broker, or solicitor who is not an attorney may not
share commissions with a person who is an active member of the State Bar of
California (an attorney). California
considers commission to include
pecuniary (pecuniary means relating to money) or non-pecuniary compensation
of any kind relating to the sale or renewal of an insurance policy or
certificate or an annuity, including, but not limited to, a bonus, gift, prize,
award, or finders fee.
Unnecessary
Replacement
Replacement means any transaction in which new life insurance
or a new annuity is to be purchased, and it is known or should be known to the
proposing agent or insurer that the transaction involves the replacement of an
existing policy or certificate by a new policy or certificate. This would include, of course, lapses or
cancellations, but it would also include converted policies to reduced paid-up
insurance, continued as extended term insurance, or other wise reduced in value
by the use of nonforfeiture benefits or other policy values. It would further include policies that were
reissued with any reduction in cash value or pledged as collateral or subjected
to borrowing, whether in a single loan or under a schedule of borrowing over time
in amounts in the aggregate that exceed 25 percent of the loan value set forth
in the policy.
An unnecessary replacement
would be one that involves the sale of an annuity to replace an existing
annuity that requires the insured to pay a surrender charge for the annuity
that is being replaced and that does not confer a substantial financial benefit
over the life of the policy to the purchaser.
A reasonable person would consider such a purchase to be unnecessary.
There are several reasons why a reasonable person might feel a
policy replacement is unnecessary:
How would an individual, whether it is the agent or the investor,
know if the replacement improved the investors portfolio? This can be answered to some extent by a
comparison of the two annuities.
Annuities often have more in common than not. If they are like annuities (both fixed-rate or both variable) it
will be fairly easy to compare them. In
the case of variable annuities, it is the investments that should be compared,
not the insurers. A substantial
financial benefit would be some element of the annuity that gave better growth,
provided better annuity features that substantially improved the investors
financial position, or moved the investor from a troubled insurer to a
financially secure company. If no real
advantages exist by the replacement, then a reasonable person would not
consider the replacement worthwhile.
It is often felt by authorities that annuity replacements are
more for agent commissions than they are for annuitant benefit. It really is very simple: if the investor
doesnt benefit, the replacement is unnecessary.
An Example:
Marthas neighbors son
just became an insurance agent. Martha
is a good neighbor and wants to help him.
He presents his annuity product.
Martha has a current annuity that is earning 4 percent interest. She purchased it five years ago when rates
were better, but she knows interest rates are down everywhere.
The product he presents has a first year bonus rate of 1 percent,
meaning the first year, Martha will still earn 4 percent. What she is not aware of is that in the
second year this annuity is paying 3 percent, not 4. In addition, she will begin a new surrender period.
Martha does replace her
policy. She pays a 3 percent surrender
penalty on the interest earnings of her present annuity, enters a new eight
year surrender period on the new product, and will decrease to three percent in
the second year on her earnings.
Although Martha wanted to be
a good neighbor, the agent certainly violated California law by replacing her
annuity. Not only did she not improve
her circumstances, Martha actually caused herself financial harm.
Under California Insurance Code 10509.9, an agent or other entity
that engages in the business of insurance, other than the insurer, who violates
the replacement requirements, is liable for an administrative penalty of no
less than $1,000 for the first violation.
Subsequent violations are liable for an administrative penalty of no
less than $5,000 and no more than $50,000 per violation. Since the agent was new, this is likely to
be his first offense. Its a hard way to learn a lesson.
Bait and
Switch Interview Tactics
Some insurance agents are under the mistaken impression that they
must hide their agenda in order to write business. They may hold a seminar under the label of a trust seminar when,
in fact, the intent is to sell types of life insurance or annuities. Or a public meeting may be advertised as an
educational experience when, in fact, the purpose is to gather names for later
contact for insurance products. Bait-and-switch
is the term used for these practices.
Bait-and-switch tactics involve anything where deception is
used. It can happen in any industry, of
course, not just insurance. The purpose
of state requirements is to prevent such tactics from taking place. In reality, the state can only do so
much. It is really up to all the
professionals that have a stake in keeping our industry respected to prevent
such happenings. How do we prevent
others from corrupting our profession?
It is not easy. However, by
expecting others to act professional, we can at least make a point that shoddy
business practices are unacceptable.
Many states have struggled with the problems associated with the
living trust industry and California is no exception. While there is a legitimate place for the trust document in
estate planning, when attorneys and agents have come together with the purpose
being a trust mill there is no quality of document and there is no purpose
for having it at all in many cases. For
the agents part, they may receive compensation from the entity putting the
trust together. Often, the trust is
never funded so there is no purpose at all for having it. If the consumer believes he or she no longer
needs a will, great financial damage may actually be done.
Of ten, agents use the pretext of estate planning through a
living trust to sell insurance products.
The products will vary, but they often involve the use of an annuity. The annuity is a wonderful estate tool when
used properly, but consumers must be aware of what they are purchasing and make
decisions based upon sound financial advice.
Neither may exist when a pretext interview is involved.
Multiple methods are used to gain the trust of consumers. It may involve a seminar that is free to the
public, using bait words such as probate avoidance, tax-exempt, or Medicaid
qualifying. Whatever catch phrases are
used, the purpose is to lure in the individual and gain access to their
financial information. Even when
insurance is mentioned in the advertising, the emphasis will be placed on
estate planning.
Elderly consumers are concerned with one major issue: will the
need for medical care deplete their existing savings? Lets follow the following individual through the scenario that
might occur:
June Baker sees an advertisement in her Sunday paper for a free
seminar on estate planning. It says
space is limited and she should pre-register by calling a toll-free number,
which she does. The individual on the
other end is very personable, obtaining basic information: her name, telephone
number, address, age, and primary estate concerns.
When she arrives she finds that she is one of many who have
chosen to attend. Most are between 60
and 80 years old. There are many single
widowed women in attendance like her.
There are two speakers: one is an attorney who discusses the living
estate advantages, using some words often (usually, most, generally). The second speaker is a businessman who talks
about protecting oneself from Medicaid spend-down and protecting financial
assets. During the final 30 minutes a
spiral notebook is passed through the attendants asking each to state their
personal concerns.
About a week later, June Baker receives a call from the
businessman that spoke. He was
responding to her stated concerns. An
appointment is set. June, who has felt
very nervous about handling her financial affairs since her husband died, is
relieved to find a person who is willing to fill his shoes. The man, James Wilson, tells her there is no
fee for his coming; it is part of the seminar services extended to those who
need his help. There will only be a fee
if she determines that she needs any extra services.
Ultimately, June does pay fees.
She pays for the attorney to draw up a trust, although she never meets
him face-to-face. She doesnt realize
it, but she also pays fees to James Wilson in the form of commissions for
products he sells her. She buys an
annuity and a nursing home and home health care policy. Attorney fees for the trust are $4,200. The business man, who is an insurance
agent, will receive between $1,000 and $1,500 from the $4,200 collected for the
trust. This is his fee for the
fieldwork collecting required information.
The attorney never meets June, never discusses her tax status, her will
(they dont even ask her if she has one), or other financial aspects of her
life. The trust she receives has been
formulated from a software program that allows the attorneys staff to simply
input her personal information. It is
not specifically designed for her needs.
Directions come with it telling June how to move her assets into the
document. Since June is not likely to
properly carry this out, the trust will remain a non-funded or empty
document.
The agent also received commissions on the products he sold. Unfortunately, while the products themselves
were fine, the method in which they were sold left June thinking that she was
financially protected against a nursing home stay and that she would be able to
remain in her own home, fully protected by coverage. She never realized the limitations in her long-term care policy
(as evidenced by her belief that she would have unlimited home care
benefits). Furthermore, she thought the
annuity would allow her to be qualified for Medicaid benefits. Had James sold her a Partnership long-term
care policy, that could actually have been accurate, but the policy he placed
was not a Partnership policy.
Therefore, there is no guarantee that her assets will be protected from
Medicaid spend-down.
The following is from the State of California:
From Harry W.
Low, California Insurance Commissioner
December 12,
2001
The purposes
of this Notice are to:
Put simply, a
living trust mill is an unlawful marketing scheme designed to accomplish the
sale of annuities that is principally used in the solicitation of senior
citizens. While the specifics of living
trust mills may vary, they all share the common attributes of misrepresentation
of identity and purpose. Each
misrepresents the actual business of the sales representative and the true
purpose of the solicitation. The
initial approach to clients may be to solicit senior citizens at seminars,
purportedly designed to educate participants about the benefits of living
trusts and other estate planning devices.
The approach may be about the benefits of living trusts and other estate
planning devices. The approach may be
through mass mailings, telemarketing, door-to-door solicitation, or even while
providing entertainment at senior related functions. Regardless of how clients are initially solicited, the sales
presentations are basically the same.
The representatives misrepresent themselves as experts in estate
planning. They gain the trust and
confidence of the client, and then misuse that trust to discover the extent of
the clients assets under the pretext of determining whether the client can
benefit from a living trust. Trust
mills typically use both licensed and unlicensed representatives, and often
operate in conjunction with attorneys or attorney reference services in order
to give the operation the appearance of legitimacy. After the living trust and related estate planning documents have
been sold, a representative, usually a licensed agent, again misrepresenting
his or her identity and purpose, attempts to sell an annuity to the client as
part of their estate-planning program.
Clients characteristically perceive the agent as their legal advisor or
estate planner and not as an insurance agent.
In 1997, the
People of the State of California, represented by the Attorney General and a
number of district and city attorneys, sought civil penalties, restitution, and
injunctive relief against Fremont Life insurance Company and others, including
a corporate licensed life agent[1]
and several individual licensees, in an action alleging unfair business
practices and false advertising under California Business and Professions Code
sections 17200 and 17500. The specific
allegations of the Complaint were that the insurer, the agents and others,
operated a living trust mill in which the agents, posing as experts in estate
planning, marketed an estate plan to senior citizens in the manner described
above. It was alleged that the
concealed material purpose for an estate planning interview conducted by the
agents was to obtain personal financial information from clients in
anticipation of the sale of a Freemont Life Insurance Company annuity, and
receipt of the commissions generated by the sale. Where clients agreed to purchase the estate plan, the agents
prepared standardized trust documents, and delivered them to the purchasers for
execution during subsequent appointments.
Typically, the agents would solicit the clients for the purchase of the
annuity during the delivery and execution process.
The lawsuit
against the insurer proceeded to trial in Los Angeles Superior Court in early
1999; the production agents having previously stipulated to a final judgment
which included civil penalties and restitution. On October 27, 1999, the court filed its Statement of Decision in
favor of the People and against Fremont Life Insurance Company. In making affirmative findings with regard
to each of the above-recited allegations, the court made the following
significant determinations:
The courts
Statement of Decision and subsequent judgment provided injunctive relief,
restitution to policyholders and civil penalties of approximately $2.5 million
dollars. While an appeal is currently
pending regarding the amount of the award of civil penalties, the appeal is not
material to the findings of the court addressed herein.
While this
litigation was widely publicized, both within and outside the insurance
industry, the Insurance Commissioner continues to receive and investigate
complaints of similar activities, and to take action against those found
responsible for unlawful practices.
These continuing circumstances have necessitated the issuance of this
Notice. The Commissioner, along with
other state and local officials, is determined to stop these fraudulent
practices by pursuing all appropriate administrative, civil and criminal
enforcement remedies necessary to the task.
The
activities described in this Notice, both with regard to the pending litigation
and general discussion, are actionable under Business and Professions Code
sections 17200 and 17500. As indicated
above, established violations can result in injunctive relief, restitution and
both civil and criminal penalties. As
well, such violations are administratively actionable under the provisions of
the Insurance Information and Privacy Protection Act,[2]
and may result in orders to cease and desist, subsequent monetary penalties and
the suspension or revocation of certificates of authority and production agent
licenses.
Insurance
Code section 791.03 provides that no insurance institution, agent or insurance
support-organization[3]
shall use or authorize the use of pretext interviews to obtain information in
connection with an insurance transaction.
Insurance Code section 790.02(u) defines Pretext Interview 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 himself or herself upon request.
Acts (1)
through (3) are inherent in the operation of a trust mill, and insurers and
agents found to have used or authorized the use of these practices will be the
subject of appropriate sanctions under the Insurance Information and Privacy
Protection Act.
While neither the Business and Professions Codes
Unfair Competition Law or the Insurance Information and Privacy Protection Act
are limited in their application to living trust mills, the prevalence of such
schemes in current marketing practices is cause for the Insurance Commissioner
to request agent and insurers to conduct a focused identification and review of
each marketing program in which they are involved, for the purpose of assessing
their compliance with the above cited statues.
Particular attention should be given to any program for annuity sales in
which the insurer or agent states or infers that they possess particular
expertise in the areas of law, finance or financial planning. Offending programs should be corrected
immediately, and remedial action should be taken. Remediation should include allowing purchasers that were
unlawfully solicited to rescind their contracts.
Thank you for
your consideration of this matter.
End of California Attachment II
California is not the only state that has had issues with the way
revocable living trusts were marketed and connected to the sale of
annuities. Other states have also gone
to court in an attempt to clean up the marketplace of such products and
practices.
Annuities are not the only insurance item that is sold from pretext
interviews. Long-term care policies are
among the insurance products that will be the ultimate sales goal. In fact, the sale of any insurance product
might be integrated into the theme of estate planning.
While many agents do complete additional schooling so that they
are legitimately able to perform some elements of estate planning, the agents
and other people that are involved in trust mills do not typically have the
required background to call themselves experts. There is concern that they are also performing the unauthorized
practice of law in the documents that they draft and deliver. The Business and Professions Code Section
6125 states: No person shall practice law in California unless the person
is an active member of the State Bar.
Agents may be giving legal advice at any point in the process from
filling out forms to interpreting the legal documents that they deliver to the
consumers.
The California Insurance
Commissioner does have the legal right to suspend or revoke any license issued
in connection with insurance. Under
California Insurance Code 1668.1 he or she may do so if the agent has:
2.
Induced a client
directly or indirectly to make the licensee or any person in his or her family
including a domestic partner, friend, or business acquaintance a beneficiary
under the terms of any intervivos or testamentary trust or the owner or
beneficiary of a life insurance policy or annuity.
The commissioner would not revoke or suspend a license if the
client is a person related to the licensee by birth, marriage, or
adoption. Nor would the commissioner revoke
or suspend a license if the client were a domestic partner. In those cases, it would be reasonable for
the licensee to handle the insurance purchases.
As previously stated, penalties would apply when agents violate
California Insurance Codes. There are
several codes that apply. CIC 782
says that any person who misrepresents the terms of a proposed policy,
including the benefits promised or future dividends, or misrepresents a policy
that is being replaced is guilty of a misdemeanor, which is punishable by a
fine not exceeding $1,500 or by imprisonment for up to six months.
California Insurance Code 789.3 allows additional penalties. Any broker, agent, or other person or entity
engaged in the transaction o f insurance (other than an insurer) who knowingly
recommends insurance providing health benefits (1) directly to a Medi-Cal
beneficiary who is age 65, (2) unnecessarily replaces a disability policy of a
person age 65 or older, (3) overloads insurance policies on someone 65 or more
years old, (4) or knowingly recommends someone 65 or older buy insurance that
will provide benefits in excess of 100 percent of actual medical expenses is
liable for an administrative penalty of at least $1,000 for the first penalty
and at least $5,000 for second and subsequent violations. The maximum penalty is $50,000 per
violation.
An insurer could be fined $10,000 for the first violation and at
least $30,000 for subsequent violations.
Their maximum penalty is no more than $300,000 per violation. The California commissioner can also require
the rescission of any contract found to have been offered in violation of the
states laws and regulations.
CIC 1738.5 states proceedings that involve allegations of
misconduct perpetrated against a person age 65 or more must be held within 90
days after receipt by the department of the notice of defense, unless a
continuance of the hearing is granted.
Once the matter has been set for a hearing, only the administrative law
judge may grant a continuance. The
administrative law judge has the option of granting a continuance due to the
death or incapacitating illness of an involved party, a representative of an
involved party, a witness to an essential fact, or for the parent, child, or
member of the household of any of these parties.
A continuance may also be granted if a party did not receive the
notice of hearing, or for a material change in the status of the case involving
a change in one of the parties involved.
It could be postponed due to a particular pleading or for an executed
settlement. It could be postponed if
stipulated findings of fact change the need for having a hearing. A partial amendment of the pleadings is not
necessarily a good cause for a continuance.
It may be necessary to grant a continuance if one of the parties
or their representative (usually an attorney) is not able to make the scheduled
date or if a substitution of the representative is necessary. Of course, an unavoidable or unforeseeable
emergency may also make a continuance necessary.
CIC 10509.9 says an agent or other person or entity (other than
an insurer) engaged in the business of insurance that recommends an
inappropriate policy replacement is liable for an administrative penalty of no
less than $1,000 for the first violation.
Subsequent violations may be penalized no less than $5,000 per
violation. The penalty may be no
greater than $50,000.
An insurer that initiates or allows an inappropriate policy
replacement may be liable for an administrative penalty of at least $10,000
dollars for the first offense and at least $30,000 for subsequent
offenses. The insurer may be penalized
no more than $300,000 per offense.
As every agent surely knows, annuities are not necessarily
suitable for every client. Each person
is an individual with individual needs and desires. The NAIC (National Association of Insurance Commissioners),
during their 2003 fall national meeting, adopted a model regulation designed to
help protect senior consumers when the purchase or exchange annuity products.
Senior Americans are the most likely focus of annuity products
since they are often converting other monies to financial vehicles aimed at
protecting their principal while producing income to live on. In addition, this age group often has the
funds to invest in annuities.
Obviously, agents will go to those consumers most likely to purchase the
product they are selling.
NAIC Senior Protection in Annuity Transactions Model Act &
Regulation
Because there was concern that seniors would be taken advantage
of, the NAIC looked at offering guidance.
This guidance came forth in the Senior
Protection in Annuity Transactions Model Act & Regulation. The new measure, which must be adopted by
the individual states, is aimed specifically at individuals who are age 65 or
older. The new regulation provides
standards and procedures for insurers and agents involved with senior consumers
as follows:
4.
It is the
responsibility of the insurance company to have a system in place that is
reasonably designed to achieve compliance with the suitability regulation. An insurer may meet this obligation by
conducting periodic reviews or by contracting with a third party to do so. If a third party is used, they must maintain
the supervisory system providing certification to the insurer that the
supervision is occurring.
The model regulation does exempt insurers and producers from
recommendations involving direct-response solicitations where no personal information
is gathered, as well as various funded contracts covered under federal law.
How does an agent determine if the consumer is a suitable person
to purchase or exchange an annuity?
Each insurer will specify their criteria, but there are some common
sense approaches as well.
Financial Status is certain a necessary component in establishing
whether or not a person should purchase or exchange an annuity product. The consumer must be able to meet day-to-day
obligations. Determining that ability
will require looking at some elements, including:
Income:
Obviously there must be the
financial means to purchase the annuity, if no exchange is involved. Often, an annuity is purchased from an
existing sum of cash, whether that happens to be a repositioning of money in a
Certificate of Deposit or a cashed out pension plan. It is possible to purchase an annuity by making systematic
deposits over a period of time, but those under the age of 65 usually do that. The NAIC annuity model act was specifically
aimed at senior consumers.
Liquid
Assets: It is from already-acquired assets that
senior annuity sales are most often developed.
It would be foolish to take all the liquid cash a consumer had and tie
it up in a long-term annuity product.
It is important that each person, including senior Americans, have cash
on hand that is readily available to them.
Long-Term
Care Insurance: While not everyone needs to purchase a
long-term care insurance product, part of the agents job is to assess whether
or not other needs have been addressed.
This is a need of senior consumers that must be considered.
The Senior Protection in Annuity Transactions Model Act &
Regulation attempts to set forth minimum standards and procedures for insurers
and agents who make recommendations to those who are age 65 or more regarding
annuity products. The point is to
assess consumer needs and financial objectives of senior consumers. This act includes the purchase of a new
product and the replacement of an existing annuity.
The model regulation says that the insurer and producer must make
every effort to obtain relevant information from the potential client who is 65
or older to make recommendations that are appropriate to assist the individual
in meeting their insurance needs and objectives. The definition of relevant customer information includes
similar data collection also required by security regulations like job status,
if any, age, income, ability to pay, amount and composition of net worth,
investment experience, and time horizon, but the insurance suitability
regulation also asks the insurer and producer to assess the need for tax
advantages, the consumers concern for preservation of principal, and the
consumers awareness of liquidity limitations and surrender charges that are in
annuities.
If the consumer refuses to supply this information, then the
agent and insurer have no duty to make suitability determinations. Producers will be able to avoid consequences
if they follow the insurers compliance procedures.
This is not the first time that there was an effort to protect
senior citizens through legislation. An
earlier attempt at defining suitability failed in part because it was perceived
as too board based.[4] The newer version of consumer protection
is trying to use a smaller focus emphasizing what has been perceived as annuity
sale abuses.
There is no doubt that there have been abuses in the sale of
annuities. Primarily, say most industry
experts, the abuse has been the lack of disclosed information. While all product information is important,
primarily the surrender fees and other costs have not been adequately explained
at the point of sale, they say.
CIC 10168.7 states that any contract that does not provide cash
surrender benefits or death benefits at least equal to the minimum
nonforfeiture amount prior to the commencement of any annuity payments must
include a statement in a prominent place in the policy that such benefits are
not provided.
Any type of financial vehicle must maintain appropriate records
so that the investor is able to tract performance. Agents must also understand the need for record keeping on the
clients they have and the types of products they have purchased. In addition, it is important that agents
keep records of the information they have gathered prior to recommending the
sale of an annuity product. This
protects the agent should a family member think that proper suitability
standards were not met prior to the annuity sale.
End of
Chapter Nine
United
Insurance Educators, Inc.
[1] Alliance for Mature Americans Insurance Services, Inc.
[2] Insurance Code section 791 et seq.
[3] Insurance-support organizations are persons engaged in the business of assembling or collecting information about natural persons for the primary purpose of providing the information to an insurance institution or agent for insurance transactions. Insurance institutions include insurers holding certificates of authority, and agents include production agents licenses pursuant to the provision of the California Insurance Code.
[4] Advantage Compendium Newsletter article by Jack Marrion 2004