Annuity Round Table: Annuities Are Compelling Products, Even In Today’s Interest Rate Environment!

Q: We were all surprised at the conviction of Glenn Neasham for wrongfully selling an annuity to an 83-year-od woman. Do you believe that this conviction is fair? Has this situation influenced your business? If so, how? What long term ramifications do you believe this situation will have on future annuity sales to senior citizens?

John Douglass: Unbelievable! The con­viction of Glenn Neasham has literally rocked the insurance industry. Since news of this conviction hit the Internet and was covered in national publications, many agents continue to be afraid and unsure of how to proceed. The devastating effect that this conviction has had on Mr. Neasham’s career and family is horrendous. He is like many other agents, and I think that is why it hits home so hard. We all feel any one of us could be in this same situation.

He worked hard, he was successful, and he was caught in a conflict of litigation and regulations gone wrong. I want to quickly get to the point of who I feel is at fault: the legal system, state insurance departments and the insurance companies that we represent.

All of us are quick to focus on an over-aggressive prosecutor or the state strapped for cash, looking for any dollar it can get at anyone’s expense. Yet what is very sad is that state insurance commissioners’ offices no longer feel they have to support insurance agents—whether it is in the state of California, or anywhere else in the United States. Today, as individual agents, we stand alone.

The only good thing to come out of this situation is that it has created an awareness of these issues. If it had not been so absurdly ridiculous that Glenn Neasham was prosecuted, many situations, not quite as severe, may continue to go totally unnoticed.

Let’s not leave the companies we represent out of the blame. In our own agency, we have experienced ridiculous situations where insurance companies, without even a phone call to the brokers to hear their side, have reversed cases that have been on the books for up to two years and charged back commissions to avoid any legal conflicts. Our outrage regarding these insurance companies’ reversals has been totally ignored. Our disapproval of new compliance procedures falls on deaf ears. The answer to our complaints has been met with more compliance requirements from some companies!

An agent meets a brick wall when questioning any compliance form. Insurance companies will not question any of their compliance procedures, and the only option for an agent is to fall in line and swallow it. Frequently the response from the insurance com­panies is, “If you don’t like it, don’t do business with us.”

Quite frankly, my answer is that I hope these insurance companies feel the impact in lost business and brokers. If they don’t care about their insurance agents’ concerns, why should we care about them? Unfortunately, companies feel no agent or agency is worth putting themselves in conflict with regulators.

There needs to be more understanding of what it takes to be in the trenches, trying to write a piece of business and filling out a dozen pages of compliance information (that in many cases is to the point of ridiculousness). I object…as hard as I possibly can! If this is the way it is going to continue, there will no longer be any agents left to write annuities or life insurance contracts. The insurance companies can sit on their pile of cash and hopefully find some place to invest it, because the agents will not be there to write new business.

It was not always this way. Our national organizations stuck up for us. We had representation in the form of national lobby groups. I felt being a member of a national insurance group meant something. I am so disappointed right now with our insurance lobbyists in the way that they have allowed the federal government to walk all over us.

This is a serious time in the insurance industry. Is the agent system going to survive? Will agents feel comfortable writing a case without being worried about being sued?

I hope this Glenn Neasham case is a wake-up call to the insurance industry as a whole. It is time that brokers and companies get together and, working with legislators and regulators, start challenging these injustices, rather than lying back and letting insurance agents like Glenn Neasham take the fall.

In summary, I stand 100 percent behind the agent who is working hard to prospect and develop cases, despite being overburdened by unnecessary paperwork regarding suitability. Yet I am afraid that because of this case we are going to have to put in place a cognitive testing program to make sure people are mentally capable—which will be just one more hurdle for agents.

If a case is placed, are we going to be questioning whether a company is going to come back and take our commissions away a year or two later (well past any free-look period) when our client decides he no longer likes the product he bought?

Are we to just have an open checkbook for the insurance companies to come in and take the commissions back just because they do not want to fight or defend us?

Will we get a new dose of compliance regulations for cognitive testing?

Will the regulators go unchecked? Let’s hope not…then we can actually spend our time selling! [JD]

Rich Hellerich: Without first-hand information and full knowledge of the particulars of this case, saying Glenn Neasham’s conviction was fair or unfair is at best speculation. Did the client appear lucid and understand what she was purchasing? Why was the specific product recommended, and did it meet the expressed needs and desires of the client?

I believe the punishment is severe when you consider the product was approved by the state insurance department, issued to age 85, and processed by the issuing insurance carrier with no apparent problems.

My question is: Why was this case not in the jurisdiction of the state insurance department? There was no evidence of actual theft of the client’s premium and, in fact, it is reported the client received her original premium plus interest.

This situation calls attention to the extra care that should be taken when making an annuity recommendation to any client older than age 80. The need to completely document all aspects of what the sale is intending to accomplish is obvious, and I believe that, when possible, the prospect’s adult child(ren) or an heir should be included in all presentations to ensure everyone is on the same page. Who better than a family member or someone with an intimate knowledge of a prospect’s behavior to be present if there are concerns regarding dementia or mental capacity?

We have several brokers who always try to include at least one adult child in the fact-finding and sales sessions with older clients, and this often results in additional business from the children regarding their own retirement assets and planning. When they experience the expertise and effort put forth for the benefit of their parent(s), asking that same advisor for help with their planning is the frequent result. Annuity professionals who always strive to do right by their clients will have no shortage of referrals.

The influence and ramifications of this case and fallout from the SEC’s attempt to regulate FIA sales practices continues to evolve. As the baby boomers flood the retirement landscape, we anticipate more issues with trying to recognize a prospect’s potential cognitive impairment and what the agent’s role will be in that effort.

My concern is that this could become a “slippery slope” at point-of-sale in requiring the writing agent to be accountable for determining the client’s mental capacity. It is one thing when a lack of mental capability is obvious and quite another when the prospect is capable of hiding the issue.

If someone can hide his condition from a trained medical professional, what will be required of the agent to determine mental impairment at point-of-sale? Will each carrier have its own standard as we see today on financial suitability issues?

We have witnessed some financial suitability standards that, frankly, seem to be a moving target. Carriers that are not communicating their standards or are applying one set of standards for all clients, regardless of issue age, have become more of a challenge this year. While we appreciate and understand the carrier’s need to avoid obvious market conduct problems, we have also seen some decisions using the “blanket” approach mentioned above rather than common sense and honoring the client’s desire for long term protection of assets earmarked for their retirement. [RH]

Ron Lane: Speaking as a licensed insurance professional for 36 years, I do not believe that Mr. Neasham should have been convicted of felony theft by a jury of his peers. He did not appropriate funds from the 83-year-old client’s insurance policies for his personal use, nor did he induce the client to loan or give him any monies. However, I do wholeheartedly believe he used poor judgment in the type of annuity he offered to this elderly client.

In my opinion, it would have been more prudent for the California Insurance Commissioner to contact the insurance carrier that issued the annuity policy to discern whether this “senior case” was properly underwritten. During a case review, if the carrier found that the owner lacked the proper mental capacity to enter into a contract, they could have cancelled the agent’s licensing appointment, charged him back the commissions and/or ultimately petitioned the California Insurance Department to impose an agent fine.

The Neasham case may affect all insurance professionals psychologically—we can only hope in a positive way. Regardless of how methodically annuity products are presented to seniors, insurance professionals can never assume consumers are processing all of that information. The prospect needs to be questioned throughout the sales process to verify that he understands the policy provisions being offered.

Field underwriting by an agent can only go so far. I would also recommend that insurance carriers stay more ivolved in the underwriting process for seniors. In the future, signed forms and financial data may not be enough to discern whether a person has the capacity to understand all of the complicated provisions of an annuity contract. [RL]

Q: What do you consider to be the best new product or product enhancement that you are recommending to brokers? Is there a product or product enhancement not currently available that you would like to see introduced?

Hellerich: Any producer active in the fixed annuity market should agree that up until the introduction of guaranteed lifetime withdrawal benefits (GLWBs), referred to as income riders generically, fixed annuities were primarily a vehicle by which to transfer assets to heirs. With the market losses of 2008, many consumers who had saved diligently for retirement were left with half those savings, with the prospect that their retirement date would move well into the future. Current volatility in the stock market, consumer fears regarding the economy, and the long term viability of Social Security have moved income planning and the strategic decumulation of retirement assets to center stage. Consumers worried about outliving their assets now enjoy more planning options and control with GLWBs versus the purchase of a single premium immediate annuity.

In this low interest rate environment, secondary benefits and/or riders have become additional options for consumers to consider in making their purchasing decisions. We are experiencing tremendous response from brokers with two key benefits—chronic care and enhanced death benefit riders.

The advent of chronic care benefits within some annuity (or life) policies provide the opportunity for a conversation every broker should have with his prospect—if only to avoid a potential E&O claim. We know many consumers have the attitude that LTC is too expensive, or that they will pay for a benefit they will never use, despite industry statistics and the articles published in Broker World on this topic.

When clients decide to self-insure for possible LTC health issues without grasping the financial catastrophe such planning can wreak on their savings, children or heirs can be quick to ask if such coverage was presented.

While chronic care benefits are not always a replacement for such coverage, they can provide consumers a tremendous option with the coverage they do provide. This is especially true when the decision comes down to rising premium costs for a consumer’s current LTC coverage, a “use it or lose it” mindset regarding LTC premiums, or a simple lack of assets available to purchase LTC, even though they want the coverage. This rider offers the ability to augment existing coverage that may be in place to help control premium outlays, avoids the belief that the premium was wasted in the event such coverage was not needed, and provides peace-of-mind for those who might not be able to afford such coverage otherwise.

Again, we believe this approach is an excellent way for the annuity broker to protect himself from a possible inquiry as to why chronic care or LTC benefits were not part of the sales discussion with the client. Such a conversation may well be as important as the client’s liquid assets when reviewing suitability of the sale and avoiding a potential E&O claim.

Another feature recently introduced with some annuity contracts is enhanced death benefits for beneficiaries. This provides clients—especially those utilizing laddered income planning—comfort in knowing that an enhanced death benefit is available to their beneficiaries in excess of the premium until the guaranteed income begins. This is an important feature to policyholders concerned with access to guaranteed lifetime income benefits, but enhanced family wealth transfer value in the event of death.

I imagine that there may well be a number of new annuity products with additional secondary benefits to benefit consumers, but I don’t anticipate many new annuity products in the near future. We work in an industry known for innovation and fast response with product and benefits to meet consumer needs, but given our current interest rate and economic reality, we need to understand that carriers face difficult challenges today in pricing annuity products, making their necessary investment spread, and managing the resulting strain on reserves. This point is brought home with a review of recent interest and option rate credits, and we have begun to see some commission reductions in the marketplace.

One way to address this might be an “à la carte” fixed indexed annuity. Comparable to a multi-year guarantee (MYGA), the base product offers the best credited interest rate and option budget. Clients can select the benefits most important to them, such as guaranteed lifetime income, liquidity benefits, enhanced death benefit, etc. I would see this product on a longer term chassis, perhaps 10 year. With this timeframe, carriers would have more room in pricing, push better crediting rate opportunities to clients, and address suitability issues. Knowing the success some MYGA products have enjoyed with this à la carte concept, this might be worth a look, utilizing a fixed indexed annuity frame.

With the annuity products we do have available today, challenges with evolving suitability review and the economic concerns for the client, carrier and agent, I believe it is now more important than ever that brokers find and take advantage of a solid partnership with an annuity marketing organization (AMO). A broker needs to evaluate such a relationship on the AMO’s ability to truly offer independent advice and case development that best serves the broker and his client, enhances the broker’s relationship with the annuity carrier, and keeps the broker informed on ever-changing market/product conditions. [RH]

Lane: There aren’t many new product enhancements in the annuity arena. Guaranteed minimum withdrawal benefit riders are still in vogue, as are some of the long term care riders. It is so difficult in today’s investment climate for carriers to earn decent spreads; thus, they aren’t working on many new product ideas.

I like bailout provisions and return of premium features in annuity products. I know they cost basis points, but consumers still rally around the perceived value of these benefits.

Somewhere down the road we may see a selection process in annuity products that permit a policyholder to elect various benefit riders at issue, such as accidental death benefits, double indemnity, LTC, bailouts, return of premium, GMWBs with inflation riders, annuitization bonuses, cumulative withdrawals and annual completion benefits that guard against mass disintermediation when rates increase. [RL]

Douglass: Unfortunately the trend in this low interest rate environment is for insurance companies to withdraw products or increase prices. The agent is taking the hit for the current economic policies, which are forcing this low interest rate environment on consumers.

Until interest rate markets return to normalcy, it is going to be interesting to see how the insurance companies are able to produce a profit and how agents are going to have competitive products to sell.

Let’s hope that in the coming months we will see some major changes in economic policies despite who is in office. We need to return to a market where there is a reasonable profit for companies and consumers—where competitive interest rates are paid, giving some relief to seniors and other consumers who need our products. [JD]

By John  Douglass, Richard  Hellerich & Ronald J. Lane, Sr. for September 2012 issue of Broker World Magazine.

John Douglass is principal of Annuities Exchange/Financial Products Corp.

Richard (Rich) Hellerich is the principal of Great Plains Annuity & Life Marketing, Inc.

Ronald J. Lane, Sr., is president of Fairlane Financial Corp.

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