Inappropriate Sale of Annuities and the Impact on Long Term Care Planning

Inappropriate Sale of Annuities and the Impact on Long Term Care Planning

By: Teresa K. Bowman

More often than not when reviewing a breakdown of a client’s current financial status during an initial consultation I find one or more annuities in either the asset or the income column. And, more often than not, the client isn’t always sure what type of annuity they have or how the annuity might affect their ability to qualify for public benefits. Sometimes we find the product they have isn’t a problem, or the problem can be easily be solved, but other times we find that not only do we have a problem that complicates planning, but we also find the purchase was inappropriate based on the clients’s circumstance, age, and health. The purpose of this article is to share with you one of the situations I came across, the solution I used to solve the problem and what I learned in the process.

Every year thousands of annuities are purchased in every state and Florida is no exception. What may be an exception is the number of complaints about those annuity sales. In 2008 our Chief Financial Officer, Alex Sink, reported that the number of complaints filed with her department had increased over 40% from the pervious year. More recently, in an announcement regarding stricter penalties for improper sales of annuities, she stated that the number of complaints from seniors has nearly quadrupled in the last three years and out of 472 investigations on financial fraud involving seniors, approximately 70 % of those were related to annuity and life insurance sales.

The clients I see have typically purchased fixed, deferred, or variable annuities usually with the idea of either creating income as they age, or preserving dollars for future generations. Often times, the annuities have been rolled over from one type to another, sometimes more than once upon the advice of the agent or the client’s desire to get the latest and best new product. Usually the agents are trying to help the client maximize their income and plan for the future based on the client’s personal wishes. However, sometimes I see annuities being sold or rolled over not with the intent to help the client prepare for the future, but to generate fees and commissions. Agents may also mislead a client regarding the policy they purchase. These practices, called churning and twisting, are part of the reason we have so many complaints. When this happens, not only does the client get hit hard with the added cost of doing business, but they may end up with a product that causes more harm than good and carries stiff penalties if funds are withdrawn early, ridiculous maintenance and administrative fees, and very low fixed interest rates. Penalties for early withdrawal can run as high as 25% and the “surrender period” can stretch for as long as 20 years in some cases.

Although there are laws that require insurance companies and agents selling annuity products to justify the sale to anyone over 65, it seems at times the process can be manipulated. Under Florida law, prior to the sale of an annuity the agent must document the basis for selling the product to a particular client. This should include an analysis of the senior’s financial and tax status and how the annuity fits in their overall investment plan. Specifically the agent must disclose the following:

The age and gender of the purchaser
The number and age of any dependants
Investment objectives
Risk tolerance
Existing assets
Annual income
Tax status
Liquid net worth
Future financial concerns and needs (medical expenses, long-term care issues, bequests to heirs, protected retirement age, etc.)
Intended use of the annuity
Source of funds to purchase the annuity
Any other information the agent deems relevant in making an appropriate product recommendation

Failure to follow any of the above or to report erroneous information could justify a rescission of the contract and a refund.

A good annuity policy will have a nursing home waiver that allows the client to access funds in the event of admission to a facility. Otherwise, without this option, a client is forced to transfer the ownership of the policy to a spouse or, if there is no spouse, cash in the policy and either spend-down the money or do some type of additional planning such as funding a personal service contract. Sometimes the client is forced to forfeit a large percentage of the money in order to move forward. In the case of a single person, what if the acting POA can’t access the funds? What if the monthly payout is not enough to cover the costs of care when combined with the client’s income? All of these types of questions should be a part of the “what if” discussion before an annuity is purchased.

Unfortunately, what I have learned is that these conversations aren’t happening, either because the agents don’t initiate them for fear of losing a sale, or the client doesn’t initiate them because they don’t want to face that possibility. Whatever the reason, and I suspect it’s both, agents have a responsibility under the law to have this discussion.