California Insurance Litigation Blog - Annuities

Avoiding the Potholes on the Road to Retirement: Understanding Annuity Risks

Robert McKennon — Tue, 20 Dec 2011 16:00:48 -0800

Saving for one’s own retirement is something everyone needs to consider. There are many financial vehicles that can be used when traveling along the road to retirement. One of these financial vehicles is an annuity. However, annuities are often not suitable for consumers, especially more elderly consumers, because of excessive “hidden” fees and large surrender charges that apply when annuities are surrendered/terminated before a certain time. This is due in part to large commissions paid to agents who sell them, who often act in their own best interest, rather than in the interest of consumers. John Waggoner of USA Today provides some sound advice in his recent article entitled “Annuities are a Retirement Option, But Be Wary of Fees:”

]]>In an article posted on this blog in September entitled, “New California Law Requires That Insurers and Agents Verify that an Annuity is Suitable for the Consumer,” McKennon Law Group PC explained that California Governor Jerry Brown recently signed a new law that provided increased protection to seniors and other consumers who are interested in purchasing an annuity. AB 689, which was sponsored by the California Department of Insurance and authored by Assembly Budget Committee Chair Bob Blumenfield (D-San Fernando Valley), requires that insurers verify that an annuity purchase is suitable and appropriate for the consumer based on an evaluation of his or her age, income, financial objectives and ten other factors.

Knowing the fundamental basics about how an annuity works, the options available and the pitfalls is essential in understanding whether an annuity should be purchased.

New California Law Requires That Insurers and Agents Verify that an Annuity is Suitable for the Consumer

Scott Calvert — Fri, 30 Sep 2011 16:59:40 -0800

California Governor Jerry Brown recently signed a new law that will provide increased protection to seniors and other consumers who are interested in purchasing an annuity. AB 689, which was sponsored by the California Department of Insurance and authored by Assembly Budget Committee Chair Bob Blumenfield (D-San Fernando Valley), requires that insurers verify that an annuity purchase is suitable and appropriate for the consumer based on an evaluation of his or her age, income, financial objectives and ten other factors. The bill was unanimously passed by both the state Senate and the state Assembly.

]]>Lawmakers felt that additional protection was necessary because many consumers have only a vague understanding of the conditions and risks associated with the purchase of an annuity. Assembly Member Blumenfield said that another reason for the new law is that annuities are often sold to seniors, who sometimes do not understand “that their money will be unavailable to them for years.” In addition, annuities are typically very expensive in the short term, a fact which is not always properly conveyed to consumers. Finally, as noted by Blumenfield, the sale of annuities is often a “breeding ground for fraud.”

Before the passage of the new law (located in the California Insurance Code, beginning at section 10509.910), agents and insurers were required to fulfill only limited requirements when selling or replacing life insurance policies and annuities. Now, insurance companies and agents must comply with very specific requirements when recommending that a consumer purchase, exchange or replace an annuity. Specifically, after evaluating 13 different suitability factors (detailed in section 10509.914(i)), an insurance company and agent can only sell an annuity if there are “reasonable grounds for believing that the [annuity] is suitable for the consumer.” See Insurance Code section 10509.915(a). The bill also requires that an insurance agent receive Insurance Commissioner-approved training before he or she can sell annuities.

McKennon Law Group PC has several cases dealing with unsuitable annuities. More often than not, annuities are not properly sold and we often find that insurance agents and insurers often do not make truthful representations about them. Although this law should help stem the tide of unsuitable annuity sales, problem annuity sales will continue to plague the insurance industry for a long time to come.

California Announces Investigation of MetLife for Failure to Pay Life Insurance Benefits

Robert McKennon — Thu, 28 Apr 2011 17:37:47 -0800

On April 25, 2011, California Insurance Commissioner Dave Jones and California State Controller John Chiang announced that they are investigating Metropolitan Life Insurance Company (“MetLife”) for a failure to pay out life insurance benefits after learning of an insured’s death. It appears that while MetLife learned of its insured’s deaths through a database prepared by the Social Security Administration called "Death Master," which lists all Americans who die, MetLife failed to use this information to pay legitimate claims.

As noted in the California Department of Insurance’s Press Release:

The Commissioner and the Controller are responding to preliminary findings from an audit the Controller launched in 2008, indicating that for two decades, MetLife failed to pay life insurance policy benefits to named beneficiaries or the State even after learning that an insured had died. The company has a huge number of so-called Industrial Policies, valued at an estimated $1.2 billion, which were primarily sold in the 1940s and 1950s to working-class people. The payments, which were collected weekly, typically were higher than the final death benefit. The Controller's unclaimed property audit indicates that MetLife did not take steps to determine whether policy owners of dormant accounts are still alive, and if not, pay the beneficiaries, or the State if they cannot be located.

In addition, the preliminary findings revealed that MetLife may have similarly failed to contact the owners of annuity contracts:

Simultaneously, the preliminary findings show, when MetLife knew that an owner of an annuity contract - which generates income for the policy owner at the time the annuity matures - had died, or the annuity had matured, the company did not contact the policy holder or beneficiary, even though it subscribed to the "Death Master" database. Furthermore, MetLife continued making premium payments from the policy holder's account until the cash reserves were used up, and then cancelled the contract.

While Monday’s press release was limited to the State’s investigation of MetLife, both the “Commissioner and Controller believe that these practices are not isolated, but are systemic in the insurance industry.”

If you believe you have a life insurance policy or annuity issued by MetLife, or any other insurer, for which you have failed to properly receive life insurance benefits, contact McKennon Law Group PC for a free consultation.

California Insurance Commissioner Jones Announces New Regulations On Annuities For Seniors

Robert McKennon — Mon, 14 Mar 2011 12:21:07 -0800

In recent years there have been many cases of insurance agents selling unsuitable annuities to members of the public, especially seniors. These annuities typically involve large premiums and very large cash surrender charges. The large cash surrender charges are often in place for at least the first five years of the annuity and usually exist because of the very large commissions that are paid to the insurance agents selling them. Also, the rates of return in the annuities are often misrepresented. Insurers and their agents also often sell unsuitable annuities as part of 412(i) plans (named by the IRS Code section which applies to them), and sometimes the IRS disallows deductions, classifying them as abusive tax shelters. In order for these annuities to be financially viable for persons or businesses buying them, the purchasers must keep them in force for many years. Because many individuals and some businesses are not in a position to keep them in force for many years, and because they do not provide flexibility, they are often grossly unsuitable for the individuals or businesses purchasing them.

On March 7, 2011, Insurance Commissioner Dave Jones announced new regulations aimed at protecting seniors from financial abuse by those selling seniors an unsuitable annuity. Here is the press release:

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“Seniors and their family members need to know that not all annuities are a good fit for their individual circumstance,” Commissioner Jones said. “While a new annuity may seem like a good idea, all too often, unsuitable annuities have cost some seniors their life savings.”

An annuity is an insurance contract that is created when an individual gives a life insurance company money which may grow on a tax-deferred basis and then can be distributed back to the owner, either immediately or over a period of time. These new regulations are an important step towards ensuring that seniors are not deceived into tying up their money in long term annuities when they cannot pay their living expenses, and are fully aware of the products they are purchasing.

The purpose of the new regulations is to require insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers aged 65 and older that result in the sales of annuities so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed. The proposed regulations are based on the National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulations of March 2010. The regulations require insurers to establish a system to supervise the recommendations made by the insurer or by the insurers’ agent to a consumer that result in the purchase of an annuity. The regulations exempt certain transactions — direct response solicitations where there is no recommendation made based on information collected from the consumer, for instance, as well as annuities used to fund certain other investments, such as ERISA plans.

The regulations set forth duties of insurers and insurance producers that in recommending to a consumer the purchase of an annuity, or the exchange of an annuity, the producer or insurer must have reasonable grounds for believing that the recommendation is suitable for the consumer based on information given by the consumer about her finances and investments. The regulations make it clear that insurers and insurance agents shall not sell an annuity unless there is a reasonable basis to believe that the annuity is suitable based on the consumer’s financial needs and objectives. The regulations require insurers to establish a supervision system designed to achieve the insurers’ and the producers’ compliance with suitability standards and allow insurers to contract out the supervision function. The regulations require that all insurance producers be adequately trained pursuant to California law prior to soliciting the sale of an annuity. The regulations give the Commissioner the authority, among other things, to order an insurer to take corrective action when he determines that a violation of the regulations has occurred. The regulations also specify record-keeping requirements for producers transacting annuities. The new regulations have been filed by Commissioner Jones with the Office of Administrative Law, where they are available for public comment and review before becoming law.

Purchasing insurance and other financial products such as annuities that meet an individual’s specific needs can be challenging. Since an individual’s financial situation may change over time, it is important to review and understand any insurance policy or contract to decide if it is still appropriate. Insurance Commissioner Jones offers the following tips to seniors who are considering purchasing a new or replacement annuity policy:

•    Obtain all proposals in writing.
•    Don’t be pressured into buying any insurance product. Take enough time to review the information before making any decisions.
•    Do not sign anything you do not understand.
•    Consider having a trusted family member, friend or advisor participate in discussions concerning the purchase of any insurance product.
•    Make sure the agent, broker and insurance company are properly licensed to sell the product you are considering purchasing.
•    Make sure you receive a full disclosure of all information relating to the benefits and possible negative consequences regarding the replacement of an existing annuity.
•    Obtain a full disclosure of all surrender charges and related time frames in connection with an annuity prior to purchase.

This information provided is not all inclusive and does not negate or preempt existing California law. If a senior or anyone has questions or wishes to discuss any insurance matter, the officers at the CDI Consumer Hotline are available to help. Please call 1-800-927-HELP (4357) or visit www.insurance.ca.gov. “

For additional information about annuities, visit http://www.insurance.ca.gov/0100-consumers/0060-information-guides/0020-life/life-insurance.cfm