AdvertisingAny business must advertise to prosper and insurance is no exception. There are rules and regulations regarding how advertising may be done. Show 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. Fines and PenaltiesCalifornias 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. Prohibited Sales PracticesWhile 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. 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. Living Trust Mills and Pretext InterviewsMany 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: California Attachment IIFrom Harry W. Low, California Insurance Commissioner December 12, 2001 The purposes of this Notice are to:
Living Trust MillsPut 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 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. Pretext InterviewsThe 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, 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 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:
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. Client Suitability for AnnuitiesAs 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:
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 certainly 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. 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 Four |
Any insurance agent who engages in the insurance business and violates the code with respect
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