Insurance brokers and companies are buzzing about the Glenn Neasham case. He was a California insurance agent who was found guilty in a criminal trial and sentenced to jail for selling an annuity to an elderly woman. The usual penalties for selling an unsuitable annuity are reprimands, fines, and perhaps a loss of license, not jail. I’m going to bypass that issue and delve into other important information the case offers.
The Neasham case reveals a panoply of almost all the sleazy and questionable insurance marketing tactics. Study this case, and you’ll be able to identify whether someone is only trying to make a sale or to fit you with an appropriate financial instrument.
I’m neither pro nor con annuities. My discussions focus on the advantages and disadvantages of different types of annuities, and I try to summarize who should consider buying a particular annuity. The issue is whether a particular annuity is appropriate for you and helps meet your financial goals.
The case involved an indexed annuity. These annuities usually offer a minimum interest rate that can rise with the stock market indexes according to some formula. For details about this type of annuity see our October 2011 visit. This one also offered guaranteed lifetime income to clients regardless of how long they lived or what the return of the annuity was. It was sold to an elderly woman who was persuaded to cash in her certificates of deposit to pay for the annuity. Her heirs complained. In addition, she named her boyfriend and his daughter as the beneficiary instead of her own children. There also were indications she wasn’t mentally competent.
Here are some tactics to beware of and lessons to learn.
The wonder product. Beware of is the agent who deals primarily with one annuity or other product and argues that it’s right for almost everyone. In this case, the agent made 80% of his sales of this one annuity, according to reports. When the annuity or other product is discussed first, it’s a warning the seller isn’t trying to learn about you and find the right fit for you.
Annuities compared to CDs. The agent compared annuity yields to CDs. That’s not appropriate, because the instruments are different in several ways. In addition, he presented advantages of annuities and disadvantages of CDs without adding the disadvantages of annuities and advantages of CDs.
Stock market-like returns. Indexed annuity yields are based on the returns of stock indexes. But, they don’t offer the same returns as the stock indexes. They use formulas that apply less than the index return to the annuity, and they also have annual ceilings and limits. Saying indexed annuities have “stock market returns” or “stock market-like returns” is misleading at best.
Commission incentive. This annuity gave the agent a commission of 8% of the amount invested, which is a powerful incentive for the agent. This apparently is the standard commission for an indexed annuity. You should know how the agent is being paid, and an agent or broker should be willing to disclose the commission and any other compensation.
Examine interest rate bonuses. The annuity offered a 10% first-year interest rate bonus plus an attractive regular yield. But there were restrictions that required some work to find and understand. This was what some call a two-tiered annuity. The owner first has to let the income compound for at least five years before taking any distributions. Then, the owner must annuitize over at least 10 years. Annuitizing means taking a schedule of fixed payments over a period of years or the rest of your life. Fail to meet either of these rules and the 10% bonus would be lost. In addition, all interest on the account would be recalculated as only 1.5% earnings on 87.5% of the account.
To be sure you understand, first the owner had to leave the account alone for at least five years. Then, money could be withdrawn only as fixed payments spread over at least 10 years. Fail to meet either of those restrictions and the bonus interest rate and the generous annual earnings would be lost.
Keep in mind that the five-year deferral period and the minimum 10 year annuitization period apply regardless of the owner’s age. If the purchaser is 80, he can’t receive any income before age 85 without triggering the earnings reduction. Then, he can receive only fixed payments that must continue until he’s at least 95. There were no exceptions.
Disclosure letter. The agent had the buyer sign a letter the agent prepared summarizing some features of the annuity and saying she made these decisions of her free will. Such documents that are outside the policy are frowned on by insurers unless they prepared them. A requirement that you sign such a letter generally should be considered as a warning that there might be a surprise or two in the policy details. Be sure you fully understand each of the items highlighted in the letter. Some commentators on the case also say the letter slanted the meaning or effects of some policy terms.
There you have in one case most of the improper sales techniques used to sell insurance products. There is the apples-to-oranges comparison. You also see the unbalanced comparison. There’s the emphasis on the annuity’s positives (a 10% interest bonus) without an equal emphasis on the onerous requirements for earning the bonus. The case also has hyperbole, promising stock market returns without risk.
There’s a reason indexed annuities pay an 8% commission. They can be complicated products that take a lot of time and effort to explain to prospects. They’re also not for everyone, so an agent likely will spend a fair amount of time with some prospects before concluding the annuity isn’t appropriate. There are many ethical, quality insurance agents. Be sure you work with them and not with someone who uses the tactics described here.
Log In
Forgot Password
Search