Anyone who grew up in the New York City area as I did watched sportscaster Warner Wolf. His signature phrase was “Let’s go to the videotape!” whenever he introduced a highlight of an amazing layup or a baseball smacked into the stands. As incongruous as this might sound, I thought of that phrase recently when I listened in on a webinar about the aftereffects of the conviction of Glenn Neasham on felony theft for selling an annuity to an 83-year-old client.
It was clear from the discussion that the Neasham case will continue to reverberate within the annuity industry and may fundamentally change how advisors sell to elderly clients. The webinar, “The Glenn Neasham Case: Lessons Learned,” was sponsored by the Society of Financial Service Professionals and moderated by Richard M. Weber, president of the Ethical Edge, Inc.
One suggestion floated was to record or videotape all client meetings.
Said Marc Silverman, head of Silverman Financial, “You’d be amazed by how many non-lawsuits there are when you record sessions.”
Burke Christensen, a business and insurance law professor at Eastern Kentucky University, also supported the idea of videotaping client meetings. “The question of competency arises [only] after the client is incompetent. The jury sees the ailing person and assumes they were that way when transaction took place,” he said.
Other safeguards were suggested as well, such as bringing in family members when discussing a sale with a senior; taking copious notes; completing a detailed fact-finder; asking the elder a series of high-level questions about the product in question; obtaining a medical certificate attesting to the senior’s mental competency; and possibly setting up a trust for a client so that a trustee or conservator handles the senior’s affairs, thereby potentially insulating an agent from a lawsuit.
In some instances, an advisor may want to forgo selling to anyone over the age of 65. Silverman said most of his clients are between the ages of 50 and 65, with very few over 70.
“I have chosen for exactly the way that this case has gone down not to play in that sandbox, meaning, over age 75,” he said. “My concern is no matter how careful you are, no matter whether you voice record what you are doing, if somebody wants to get you they are going to get you one way or another as in this case.”
Silverman also said that he insists a family member sit in when he works with a senior. “I don’t want one of the children who wasn’t in the meeting [with a senior] to come back to me and say, you recommended this to my parents and the investment didn’t work out well, or it’s not what they understood so we’re going after you.”
However, even that might not be an ideal solution, since, as Weber pointed out, many seniors would prefer to keep their financial affairs private from their children.
Particularly perplexing for the panelists was the question of just how are advisors supposed to ascertain a senior’s cognitive abilities, something they have no training for? And as several panelists stressed, complicated products like annuities are difficult for most people, of any age, to comprehend.
Maribel Gerstner, president and COO at Allstate Financial Services, the company’s broker-dealer arm, said that her company does some training for its reps on how to spot cognitive impairment, yet it in no way makes them medical experts. “We’re kidding ourselves if we think we can make assessments of mental capacity,” she said.
Even if an advisor detects a problem, what do they do then? “Elderly individuals still need help with their financial matters,” she said.
Annuity expert John Olsen, president of Olsen & Marrion, LLC, called it a classic “catch 22” situation. “We can be held liable to make a determination about a client when we have no training to make such a determination. If try to do so, with the skills we have, we’re left with hoping that these are sufficient. There are no existing safe harbors.”
Olsen called on the NAIC to resolve the issue. “We must be given assurance that if we do certain things, we will be OK. Otherwise, nothing we can do will protect us.”
Guy Kornblum, a San Francisco-based insurance lawyer, said that while videotaping and asking detailed questions are good, even those procedures may not be enough to totally insulate an advisor from legal action. A senior “can disguise” their mental state, Kornblum said. Therefore, there might need to be third-party verification of mental competency, such as by a medical doctor, trustee, legal advisor or family member, he added.
But what do you think? Is it time for advisors to videotape meetings with senior clients? What procedures have you instituted in the wake of the Neasham verdict? Source: www.lifehealthpro.com– 11/Mayo/12
These 13 annuity terms separate the novice from the expert.
Annuities have many benefits — security, flexibility, tax efficiency — but few would argue that simplicity is one of them. A successful sale is also an education process, uniquely tailored to the client. The foundation of all of this, of course, is the language. You may not have been directly asked about dollar cost averaging lately, but that doesn’t mean your clients don’t need to know what it is.
How well can you define some of the terms that are foundational to this product line? Keep reading to test your knowledge.
Variable annuity payments increase or decrease based on the net performance (returns after fees and expenses) of the underlying investments in relation to a benchmark assumed investment return. If the total investment return minus expenses exceeds the AIR, the payment increases. If the return minus expenses is less than the AIR, the payment decreases. If the return minus expenses equals the AIR, payments remain the same.
B-Share Variable Annuities
Variable annuity contracts characterized by deferred sales charges, which typically range from 5 percent to 7 percent in the first year, and subsequently decline to zero after five to seven years. B-shares are the most common form of annuity contracts sold.
Bonus Share (X-Share) Variable Annuities
A bonus amount, typically defined in the prospectus as a percentage of purchase payments, is allocated to the annuity accumulation value early in the contract period. This type of annuity typically has higher expenses to pay for the cost of the bonus.
Dollar Cost Averaging
A program for investing a fixed amount of money at set intervals with the goal of purchasing more shares at low values and fewer shares at high values. Variable annuity dollar cost averaging programs involve allocating a certain amount to one investment subaccount, such as a money market fund, and then having portions of that payment periodically transferred to other subaccounts. Dollar cost averaging does not guarantee a profit or prevent a loss in declining markets.
Exclusion Ratio
The formula that determines which portion of an annuity payment is considered taxable and which is a tax-free return of principal. For variable annuities, this formula is similar; however, due to the fluctuating nature of variable payouts, this is recalculated annually and is reported as an exclusion amount.
I-Share Variable Annuity
Also known as fee-based variable annuities in which an investor pays one fee to have the portfolio managed by an investment advisor. I-shares do not offer a sales commission to the advisor. However, the advisor assesses fees for the services, including the I-share contract, which is agreed upon by the client.
Immediate Annuity
An annuity purchased with a single premium on which income payments begin within one year of the contract date. With fixed immediate annuities, the payment is based on a specified interest rate. With variable immediate annuities, payments are based on the value of the underlying investments. Payments are made for the life of the annuitant(s), for a specified period, or both (e.g., 10 years certain and life).
Market Value Adjustment (MVA)
A feature included in some annuity contracts that imposes an adjustment or fee upon the surrender of a fixed annuity or the fixed account of a variable annuity. The adjustment is based on the relationship of market interest rates at the time of surrender and the interest rate guaranteed in the annuity.
O-Share Variable Annuities
Annuity contracts that do not impose up-front sales charges, while, typically, possessing surrender charge periods similar to B-shares. Mortality and expense charges are assessed, and progressively decline throughout the surrender period.
Private Annuity
A private annuity is an arrangement in which the client transfers property to an individual or entity in return for a promise of fixed periodic payments for the rest of the client’s life. In private annuities, the person or entity assuming the payment obligation is not in the business of selling annuities.
Systematic Withdrawal Plan
A distribution method that allows a variable annuity contract owner to periodically receive a specified amount as a partial withdrawal from the annuity contract value prior to the annuity starting date. Unlike lifetime annuity payments, systematic withdrawals continue until the contract value is exhausted. Systematic withdrawals are taxable to the extent they represent investment gain in the contract.
Unit Value
A measurement of the performance of the underlying funds in a variable annuity, similar to the share value of a stock. Each investment subaccount has a separate unit value. The unit value increases with positive investment performance in the subaccount and decreases with negative investment performance and with asset management and insurance charges.
Wrap-fee
A comprehensive charge levied by an investment manager or investment advisor to a client for providing a bundle of services, such as investment advice, investment research and brokerage services. Wrap fees allow an investment advisor to charge one straightforward fee to their clients, simplifying the process for both the advisor and the customer.
How annuities are funded and why the current rates are so low
By Pam Atherton.
Most people will buy an annuity when they come to retire but how do they work and why are annuity rates currently so poor?
An annuity is like a mortgage in reverse. An insurance company assessing the risk of underwriting an annuity for a 65 year old man, will assume he will live for around another 18 years to 83 age (the average life expectancy for a male in normal health).
Billy Burrows of William Burrows Annuities says: “Once an insurer has decided on your likely life expectancy, it will then calculate how much capital and interest it needs to provide the annuity, with the yield being based on a long-dated bond.”
Annuity rates are influenced by four factors: life expectancy, the yield (or return) an insurance company can obtain by investing the annuity money in gilts and corporate bonds, the insurer’s internal operating expenses and the cost of meeting EU reserving requirements, known as Solvency II.
Traditionally, insurers have invested in Government gilts to support their annuity books, but because gilt yields are currently so low, most insurers use a mix of gilts and corporate bonds because the latter tend to pay higher yields (albeit with a varying risk of default).
The ratio of corporate bonds to gilts used by an insurer will vary according to the nature and composition of its annuity book, but could be as high as 80/20.
Gilt yields have fallen dramatically since the early 1990s because they are dictated by prevailing interest rates, inflation and supply and demand.
In 1990, base rate hit 15 per cent, inflation soared to 10.9 per cent and there was less demand for gilts than now. This meant that annuity rates were extremely high, so that a 65 year male, buying a level paying annuity with a £100,000 fund in 1990, could have secured an annuity rate of 15.54 per cent from Prudential.
Today, base rate is 0.5 per cent, consumer price inflation is 3.2 per cent and demand for gilts has soared as insurers have bought large quantities of gilts to back the annuities of the baby boomer generation now reaching retirement, and final salary schemes have bought gilts to match their maturing liabilities.
This increasing demand for gilts has served to drive gilt prices higher and yields lower, so that a 15 year gilt today pays a mere 3.37 per cent, compared to 10.9 per cent in November 1990.
This means that annuity rates have fallen steadily since the 1990s. The best rate that a 65 year old man, buying a level paying annuity with a £100,000 fund today, could obtain is 6.8 per cent from Aviva, less than half the annuity rate payable in 1990.
With annuity rates currently so low, it is all the important that people approaching retirement shop around for the best rate by using what is called the “open market option.”
This allows you to scour the market for the best rate for your needs, which may not be from your existing pension fund provider.
Those in poor health, smokers and the obese can obtain rates up to 30 per cent higher than standard annuity rates as they may be eligible for ‘enhanced’ or ‘impaired life’ annuity rates because their life expectancy is likely to be shorter than those in normal health.
Insurance company, Just Retirement, believes up to 40 per cent of retirees could be eligible for these higher rates. But it is still worth shopping around, even if you are healthy, as rates vary considerably across the market.
Some pension analysts, such as Dr Ros Altmann, the director general of Saga, believe the government should issue longevity bonds to relieve insurers of the longevity risk associated with annuities, because even a small increase in life expectancy can increase the cost of providing an annuity significantly.
A longevity bond is a bond which creates a hedge against the financial risks associated with increasing life expectancy by paying coupons (interest) in line with the survival rate of a group of pensioners of a specific age group.
For instance, an insurance company could purchase a longevity bond to cover the life expectancy of all the over-90 year olds, or all the over-70s on its books.
The finance industry has developed various tools to hedge longevity, but if the government were to issue longevity gilts, it would broaden the market and help set a market price.
To date, only a few investment banks have launched longevity bonds backed by investors such as hedge funds. The latter calculate and assume the risk of rising life expectancy and charge the annuity provider or pension fund accordingly.
A group of investment banks is in the process of constructing a mortality index to which longevity bonds could be linked.
Pensions and annuities (II): back to the drawing board?
ByDuncan Minty.
The scale of the ethical challenge facing pension providers can be neatly illustrated by the fact that most people completely misunderstand what a pension is. Most people think of it as the monthly payment they receive after retirement, when in fact, it’s the product into which savings are accumulated prior to retirement. This misunderstanding can of course be quickly sorted out as the person nears retirement, but nevertheless, it is symptomatic of the gap between those who manufacture pension products and those who buy them.
Is misunderstanding inevitable?
Is such misunderstanding inevitable with a complex product like insurance? Not at all. Some commentators (including within the market itself) see it as having been build up to allow for more lucrative annuities sales at the point of retirement. That comfortable carpet of sales has now been pulled from under their feet by the Chancellor’s reforms.
So the number one ethical issue that pensions providers must tackle is ‘information asymmetry’: the imbalance in understanding between provider and purchaser. That inevitably means simpler products, which can then be sold on more clear terms and relied upon later in life with greater certainty.
Insurers are being encouraged along this simplification route by the UK’s Financial Conduct Authority. Its chief executive, Martin Wheatley, has indicated that simplified polices will be looked upon favourably by regulators, on the basis that they are likely to lead to fewer conduct problems later on.
A Revolution in Language
Simplication should also bring about a revolution in pensions and annuities language. Policies have previously been written mainly with the financial planner in mind, but as adviser firms orientate their business towards those more able to pay their regular fees, a gap is opening up around those with small to mid sized pension pots. More simply worded policies help fill that gap: they’re more easily designed with a target market in mind, more easily understood by that target market, more easily sold on a direct basis and if necessary, more confidently bought on an execution only basis.
Stratification and access
Another ethical issue that pension providers must together face up to is stratification and access. There’s a danger that in times of change and uncertainty, the market adopts an even stronger focus on those customer segments it feels most secure dealing with. If this is at the cost of attending to other, less familiar, perhaps more challenging, segments, then there’s a danger that some types of consumer will find access to pensions much more difficult. Times of change are opportunities for innovative thinking, not repeat thinking, both in terms of the design of products and the ethical ideas that influence them.
Another question that each insurer needs to carefully weigh up on a set of ‘ethical scales’ is how much longevity risk they incorporate into their product offering. The market has been criticised for distancing itself from longevity risk and should this apparent trend continue, it needs to be clearly signalled in how products are targetted and communicated.
And is this ultimately a healthy trend? Is long term insurance with reduced longevity risk a bit like say, a car without fuel: in other words, nice on the outside, but really, what’s the point? A popular phrase here in the UK is ‘it does what it says on the tin’, which, for long term insurers, means grasping longevity risk and delivering the value that comes from risk transfer and pooling.
Pensions and annuities (I): will insurers rise to the ethical challenges facing this market?
By Duncan Minty.
The pensions and annuities market in the UK is huge. It is also complex and undergoing considerable change, or to put it another way, frequently misunderstood and politically charged. So in the next few posts, I will be highlighting a series of ethical questions that the market needs to find lasting answers to in order that the transformation it is about to undergo delivers public confidence in private provision for retirement.
The pensions market will have their work cut out to deliver renewed public confidence. It has a chequered history of misconduct that has tilted public trust away from it. This led to a lower take-up of what the mainstream market was offering, which raised concerns in Government about an increased burden on the state. This in turn encouraged Ministers to tinker with laws and taxes around pensions to boost pensions take-up, which produced even more complexity and a market the in’s and out’s of which were even more difficult to understand. A simplified overview no doubt, but one that many in the public would recognise.
The latest stage in this long running saga was the surprise announcement by the Chancellor of the Exchequer in March this year of sweeping reforms to the options at retirement available to consumers with a defined contribution pension. The Chancellor also promised that by Apri l 2015, all of the circa 400,000 people who reach retirement age each year would be offered ‘impartial, face to face and free at point of use’ guidance. Interesting tactic – turn the market on its head and then tell it to quickly and hugely scale up the very type of guidance that it has at times struggled to deliver to a much smaller audience.
Delivering this revolution will make many demands on the pensions market, but probably the one it will find most challenging will be the regaining of public trust. After all, the “best laid schemes o’ mice an’ men” will count for nothing without that trust. So there’s a danger that a huge amount of effort, innovation, redesign and reorganisation will count for nothing unless the sector faces up to, and tackles, some fundamental ethical challenges.
So where should a typical insurer or adviser network start? Certainly the first thing not to do is make a grab for the nearest and most obvious ethical issue and tell everyone in your firm to do better at it. Such flurries rarely have any lasting effect. Equally, taking huge strides to offer more and more guidance to many thousands more people will achieve little unless those people feel able to trust what they’re being told and unless the options on offer to them feel more secure than, say a buy-to-let property. We’re talking about a mountain to be climbed here.
The ethical issues I’ll be looking at over the next few posts fall into two broad categories: design and distribution. When questions are raised about misconduct in the pensions market, the focus is invariably on the distribution side: conflicts of interest, inducements and suitability for example. And these are big issues, but, starting in the next post, I’m going to look first at the design side of pensions, for I believe that is where the root cause of many of the sector’s problems lie. The three subsequent posts will then look at distribution, data and how insurers can respond to the ethical issues raised.
The pensions and annuities market in the UK is huge. It is also complex and undergoing considerable change, or to put it another way, frequently misunderstood and politically charged. So in the next few posts, I will be highlighting a series of ethical questions that the market needs to find lasting answers to in order that the transformation it is about to undergo delivers public confidence in private provision for retirement.
The pensions market will have their work cut out to deliver renewed public confidence. It has a chequered history of misconduct that has tilted public trust away from it. This led to a lower take-up of what the mainstream market was offering, which raised concerns in Government about an increased burden on the state. This in turn encouraged Ministers to tinker with laws and taxes around pensions to boost pensions take-up, which produced even more complexity and a market the in’s and out’s of which were even more difficult to understand. A simplified overview no doubt, but one that many in the public would recognise.
The latest stage in this long running saga was the surprise announcement by the Chancellor of the Exchequer in March this year of sweeping reforms to the options at retirement available to consumers with a defined contribution pension. The Chancellor also promised that by Apri l 2015, all of the circa 400,000 people who reach retirement age each year would be offered ‘impartial, face to face and free at point of use’ guidance. Interesting tactic – turn the market on its head and then tell it to quickly and hugely scale up the very type of guidance that it has at times struggled to deliver to a much smaller audience.
Delivering this revolution will make many demands on the pensions market, but probably the one it will find most challenging will be the regaining of public trust. After all, the “best laid schemes o’ mice an’ men” will count for nothing without that trust. So there’s a danger that a huge amount of effort, innovation, redesign and reorganisation will count for nothing unless the sector faces up to, and tackles, some fundamental ethical challenges.
So where should a typical insurer or adviser network start? Certainly the first thing not to do is make a grab for the nearest and most obvious ethical issue and tell everyone in your firm to do better at it. Such flurries rarely have any lasting effect. Equally, taking huge strides to offer more and more guidance to many thousands more people will achieve little unless those people feel able to trust what they’re being told and unless the options on offer to them feel more secure than, say a buy-to-let property. We’re talking about a mountain to be climbed here.
The ethical issues I’ll be looking at over the next few posts fall into two broad categories: design and distribution. When questions are raised about misconduct in the pensions market, the focus is invariably on the distribution side: conflicts of interest, inducements and suitability for example. And these are big issues, but, starting in the next post, I’m going to look first at the design side of pensions, for I believe that is where the root cause of many of the sector’s problems lie. The three subsequent posts will then look at distribution, data and how insurers can respond to the ethical issues raised.
– See more at: http://ethicsandinsurance.info/2014/08/26/pensions-pt1-challenge/#sthash.wSDXq63V.dpuf
It’s all about lifetime income these days. That’s how Douglas Dubitsky, below right, vice president of product management and development for retirement solutions at Guardian Life Insurance Co. of America, sums up the current annuity landscape. Weary of seeing their savings battered by a fickle market, the public and their advisors are coming to understand the value annuities can bring to a retirement portfolio, namely, income one cannot outlive.
“Even when the markets go back up, people are going to look for that consistent, reliable, guaranteed lifetime income, and at that end of the day, only an insurance company can provide that,” said Dubitsky in an interview.
Consequently, Guardian intends to grow what Dubitsky called its “income business.” Among Guardian’s main annuity products are a variable annuity with a living benefit rider; a single premium immediate annuity; and single premium deferred annuities. Last year, the company did more than $1 billion in variable annuity sales. It has a smaller footprint in the fixed annuity arena, where it did just under $100 million in sales last year. Dubitsky, who is based in New York City, said low interest rates have made fixed annuities less of a priority for Guardian. “But it will be an important product again once we get some interest rate pick up,” he said. The company does not do equity indexed annuities.
“Designer income”
As someone who has worked in the annuity business for 15 years, Dubitsky has seen a shift in product concepts as well as how the public perceives annuities.
“The annuity business used to create products and the financial advisor had to fit their client into our products,” Dubitsky said. “Over the past few years, it’s much more about creating a product that has flexibility in it so that the financial advisor and ultimately their client can design the income plan to fit their need.”
Or, as he termed it, “designer income.” For example, in Guardian’s variable annuities, a policyholder can choose the percentage of funds he or she wants in equities or fixed income, going from 80/20 down to 40/60. They can also select from a menu of different holding periods, so policyholders can decide to take the payout when they need it most. There are also cost of living adjustment riders. “When I talk about flexibility, it’s really focused on allowing the product to meet the needs of the person who is buying it,” Dubitsky said.
Because of those flexible options, coupled with the sting of market upheavals still fresh in the minds of consumers, annuities are now being seen in a new light by the general public, Dubitsky said.
“The past few years have been exhausting for people in the marketplace‑exhausting for companies and for consumers opening up their statements every month,” he said. “And the need for guaranteed lifetime income that you cannot outlive is starting to resonate in this country at a level it hasn’t in the past.”
What liquidity really means
Dubitsky conceded the industry has failed to clearly explain to the public what is admittedly a complex product. To help people better understand the benefits of an annuity, the industry now needs to educate consumers on what liquidity really means.
To most, liquidity means going to the bank on any given day and having access to their money. But Dubitsky said that is the wrong way to view liquidity.
“People always believed I need to go to the bank on July 17 and have access to my money. That’s liquidity,” he said. “No, liquidity is having cash flow on July 17, August 17, September 17 in 2012, 2013 and 2014, and every year for the rest of your life. That’s liquidity. That piece has been so misunderstood by advisors, the public and the industry. And that’s a story we really need to tell. Because that’s what provides people the flexibility and freedom to do things in their life.”
An annuity frees up the advisor to do his job as well. Once a client’s basic expenses are covered by an annuity, the advisor can concentrate on maximizing the client’s discretionary assets.
“Nobody is talking about taking all the client’s assets and annuitizing them,” Dubitsky explained. “Look at your client holistically. You cover their basic needs with guaranteed lifetime income…And that allows the advisor to now be an advisor on the rest of the assets.”
Focused distribution
Dubitsky acknowledged the annuity industry faces myriad challenges today, mostly stemming from the low interest rate environment.
Guardian manages those risks by having a focused distribution channel through its agency sales force; its broker-dealer, Park Avenue Securities, LLC; and selected independent financial planners. It does not distribute widely through banks and the wirehouses, thus it can avoid making “knee-jerk” reactions based on short-term market volatility, Dubitsky said.
“The fact that we have targeted distribution allows us to be more thoughtful and more strategic in our thinking, because I don’t have the fear of uncontrollable flows coming in,” he said.
Guardian also carefully selects the funds in its annuity products. “In addition to looking at the stability of the fund, its track record, and the consistency of the management team, we have to be able to hedge it,” Dubitsky said. “That’s a huge aspect of risk management and that causes tremendous selection in the fund family. We are also very focused on what our benefits provide and matching the right benefits to the marketplace and keeping a competitive product, but at the same time making sure it’s a risk that’s going to enable Guardian to remain a strong company.”
Another hurdle is simply trying to break apart the misunderstanding of annuities, said Dubitsky. “We used to run from the word annuities. We don’t do that anymore. Annuities are a good thing.” Source: LifeHealthPro. July 16, 2012.
California Appellate Court nixes Neasham conviction
By Maria Wood
An Appellate Court in California has overturned Glenn Neasham’s 2011 conviction for theft from an elder stemming from the insurance agent’s sale of an annuity to a then 83-year-old woman.
In the judgment handed down Tuesday by the Court of Appeal of the State of California, First Appellate District, Division Three, jurists wrote that “although there was conflicting evidence as to the elder’s ability to understand the nature of the transaction, there was no evidence that defendant [Neasham] appropriated the elder’s funds to his own use or to the benefit of anyone other than the elder herself, nor was there evidence that the defendant made any misrepresentations or used any artifice in connection with the sale.”
Further, the court ruled that the instructions given to the jury were incorrect in that the panel was told it had only to find “the purchase of the annuity deprived the elder of a major portion of the value or enjoyment of her property, eliminating the necessity of proving that defendant had any such intention.”
“I was overwhelmed with joy yesterday,” said Neasham in an interview with LifeHealthPro.com. “My family and I are ecstatic about the outcome because it was reversed in full. We’re hoping we can get on with our lives, get our insurance license back and move forward.” Neasham did 100 hours of community service and paid a $5,000 fine in connection with the case.
The case could be returned to the local district attorney’s office, according to Neasham. His attorney at the trial, Mitchell Hauptman, told him that it was “highly unlikely” the case would be re-tried because Schuber’s money was returned to her in full with interest in 2012; therefore, there was no theft. Further, Neasham said that Schuber is now deceased.
Calls to Rachel Abelson, the Deputy District Attorney who tried the case, were not returned by press time. In a local newspaper report, she was quoted as saying there was “a possibility of appealing the decision.”
The saga began in 2008, when Louis Jochim, a client of Neasham’s brought his live-in girlfriend, Fran Schuber, to his office to discuss the purchase of an annuity by Schuber. Ultimately, Schuber purchased a MasterDex 10 Annuity issued by Allianz Life that had a premium of $175,000. The California Department of Insurance has approved the sale of that policy to persons through the age of 85.
When Jochim and Schuber went to the bank to withdrawal the funds for that premium, a bank employee later contacted the Department of Social Services because she believed that Jochim was “exerting undue influence” on Schuber. That triggered an investigation by authorities into possible elder abuse. According to the recent Appellate Court ruling, government investigators uncovered evidence that Schuber was confused and suffering from dementia. Also included in the court document was a notation that Neasham called the bank to advise them of Schuber’s arrival and that if there were any delay in the withdrawal process, he would contact the district attorney’s office.
So in October 2011, the case went to trial in Lake County, California. A detailed investigation of the trial by National Underwriter Life & Health revealed possible bias against Neasham by some jurors and other procedural issues. Neasham was subsequently convicted of theft from an elder, a felony.
During the trial and in subsequent press reports about the case, Neasham maintained that he had seen no evidence of Schuber’s dementia at the time of the sale. Her condition was definitively diagnosed long after the transaction. Neasham also stated that he took steps to ensure that Schuber understood the annuity she had purchased. A former assistant to Neasham testified at trial that Schuber appeared competent at the time the sale was being discussed.
Within the insurance industry, the case set off a heated debate over the question of selling complex financial products, like annuities, to seniors. Many agents contended the Neasham conviction would cause them to curtail the sale of such products to any elder, even if that person appeared to be in full control of their faculties and would benefit from the annuity. Industry observers also decried the increased scrutiny the case might bring upon annuity sales. Since the Neasham case hinged on whether Schuber was mentally competent at the time of the sale, many in the industry argued that it was unfair to hold insurance agents fully accountable for assessing the mental state of an elderly client. In the wake of the trial and conviction, many advisors spoke about increasing their due diligence and suitability review when dealing with senior clients.
Fixed Annuities & Rising Interest Rates: Can They Get Along?
By Cary J. Carney
When 2012 arrived, some in the financial services community opined that the era of historically low interest rates was beginning to wind down. But this promising rise didn’t last. In early 2012, interest rates suffered a disappointing retreat, which is particularly challenging for retirement savings options such as money market accounts and certificates of deposit (CDs), which are highly sensitive to interest rates.
Traditional fixed annuities also have struggled due to the continued low interest rates. In fact, total sales of fixed annuities dropped 10 percent in the first quarter, according to a report by LIMRA in April.
Yet LIMRA’s report also pointed out a bright spot on the annuity front: fixed indexed annuity sales jumped 14 percent in the first quarter, outperforming traditional fixed annuities for the third consecutive quarter and capturing 45 percent of the fixed annuity market. It is widely understood that this growth is largely driven by consumer interest in the income riders that offer reliable guaranteed income. Such sales outperformance came as little surprise to financial professionals who are familiar with fixed indexed annuities and their specific characteristics. These products provide clients seeking retirement income with a sound combination of flexibility in interest-crediting options and limited upside potential.
Here’s how they do it.
Fixed indexed annuities depart from their traditional fixed annuity counterparts in that they give owners some interest-crediting potential, which is typically linked to the performance of one or more market indices. The owner can put all or some of the annuity’s value in the index-crediting strategy and/or elect to allocate some portion to the fixed interest rate strategy that is typically offered. If the index performs consistent with the index-crediting strategy, the owner benefits, yet if the index goes down, a credit may not be received. However, either way, the owner’s principal is protected. And every contract anniversary date, the annuity owner can re-allocate between the index and the fixed and index components of the product to seek a more appealing balance.
If rates rise, then what?
It’s clear from LIMRA’s findings that buyers are out there for fixed indexed annuities, yet many financial professionals may not fully understand what is driving this demand. After all, the interest rates on the fixed portions of these products have been nothing to write home about. Why are people buying these products? We can speculate that interest rates have been low for so long that, for many clients, these rates have become the “new norm.” As such, financial professionals must adjust their view of the interest rate hurdle and potential sales opportunity this product category represents.
The major hurdle to sales of fixed annuities is the prospect of future rising interest rates. Now, more than ever, financial professionals and clients alike are finding it hard to envision rates going any lower. They share the sentiment that rates will rise in the coming year or so, which can make a range of long-term interest-rate-linked instruments, including fixed annuities, seem less attractive at today’s rates.
In response to these concerns, some insurers have introduced new features on their fixed indexed annuities to credit interest if rates rise. Some carriers have introduced interest-rate-based crediting strategies that use a point on a published “swap curve” as the benchmark rate, while another approach provides the fixed indexed annuity owner with credit based upon an increase, if any, in the three-month London Interbank Offered Rate (LIBOR). This index strategy credits interest if the three-month LIBOR rises from one annuity anniversary to the next.
In practice, this feature typically allows the annuity owner to work with their financial professional to create a degree of diversification of index-crediting strategies within the product. They may be able to adjust how much is allocated to the product’s options for a guaranteed rate, equity index and interest rate benchmark, leveraging the annuity’s potential to act as a durable and flexible vehicle for retirement savings.
Tough conversations.
Regardless of whether a fixed annuity–of any variety–might be a good fit for a particular client, many financial professionals first must deal with various myths about the product that might make the client leery. Perhaps the most common myth, one that can undermine trust from the very beginning, is that fixed annuities are laden with fees and charges that are kept out of sight of the buyer. Typically, the base fixed annuity has no direct fees. Generally, optional features and benefits–such as guaranteed income or specific death benefits–are the only direct fees charged to a contract holder.
Surrender charges can be another point of confusion. Some clients may imagine that they face punitive fees that will prevent them from accessing any of their funds if they need them. Here, too, is another opportunity for a financial professional to explain what surrender charges are, when they are incurred and when funds can be accessed without the imposition of a surrender charge. For example, typically, an annuity owner can withdraw up to 10 percent of the annuity’s value in a given year without penalty. Additionally, many annuities follow the “10/10 rule,” which limits surrender charges to 10 years and 10 percent in the first year of the annuity. Such charges diminish over time and completely disappear by the end of 10 years. Of course, regardless of the “10/10 rule” all surrender charges must be considered carefully in any situation when a client is considering an annuity purchase.
Limits on interest crediting in fixed indexed annuities, such as caps, spreads and participation rates, also may be misunderstood, with clients thinking that such limits somehow boost profits for insurers. Generally, the insurance company purchases hedges to cover the cost of index credits that the annuity owner gets paid. In other words, an insurers’ hedging strategy typically means that they are not impacted by the actual performance of the respective index and don’t get a windfall depending on the actual market performance or interest rate movement.
Taking action
Plenty of financial professionals have clients who are treading water: Clients worry about stock market volatility on the one hand, but also are reticent to lock into current interest rates that may turn unacceptable if rates rise in the coming months. Fixed indexed annuities, including those with features that take advantage of rising interest rates, may present a viable solution for these clients.
By providing the real story about new strategies and options–and addressing some of the negative myths–financial professionals can help their clients overcome their fear of the future and get back to saving for a more secure retirement.
Source: LifeHealthPro, August 23, 2012.
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About the Author
Cary J. Carney is the vice president of independent distribution for ING U.S. Insurance’s annuity and asset sales business, overseeing business development from the national marketing organizations, external wholesaling efforts and providing support for product development and marketing initiatives for the company’s annuity business. He has held a number of positions within ING U.S. since 1997. Prior to joining ING, Cary was a property & casualty and life insurance representative. He also holds his series 6, 63 and 26 securities licenses.
With the future of Social Security uncertain and traditional pensions becoming a luxury of the past, the burden of financing retirement is increasingly falling on the shoulders of your clients. To address these growing concerns we reviewed how we can help our senior clients with risk management strategies that include annuities. We have looked at the “features” of an annuity. We pointed out that features are what the product “has” or “does”; benefits are “why” your client would want those features. In other words, features are about the product, while benefits are about the client.
In this article we will look at the benefits of the annuity product for our clients. In other words we will learn “why” our clients would want to have an annuity. The reason we want to review both the features and the benefits of the product is because “features” are the language of logic. Even people who insist they buy logically or based on features do so because that’s what makes them “feel” better. Benefits are the language of emotion. Focus on emotions, not intellect. People buy on emotion but are moved to action by logic. We have to provide an emotional justification to make a logical purchase.
Annuity Benefits
1. Tax Deferral
Perhaps the most attractive advantage of an annuity, other than income for life, is tax deferment. Earnings credited to an annuity are not taxable as income until withdrawn.
Tax deferment and the miracle of compounding allow annuities to out-perform most other taxable investments. Because of tax-deferment, annuities (through “triple compounding”) produce more growth more quickly.
Triple compounding allows annuities to accumulate interest on principal, earn interest on interest, and earn interest on money not taken out for taxes, thus a higher effective yield.
The following chart compares how money may grow taxable versus tax-deferred.
2. Taxes on Social Security
It may be generally unknown that annuities can reduce or eliminate taxes on Social Security. Income over a certain amount may cause a portion (up to 85 percent) of Social Security income to be taxed. Enough money may be placed into an annuity to reduce income below the threshold amount so that Social Security benefits will not be taxed. This, of course, only works for those who do not need the investment income to augment their current income.
3. Avoid Probate
Probate is the process used by individual states to determine the tax liability and the proper transfer of an estate. If the deceased has no will, he or she dies intestate, and the probate courts will determine how the estate is to be apportioned. There are many problems with probate. Among them:
• Lack of Privacy. The process of probate is a matter of public record. Notice is required to be given to all interested parties so that claims may be brought against the estate.
• Delay. It is not unusual for the probate process to require several years depending on the size, complexity and number of claims against the estate.
• Cost. Probate can be expensive. There are associated fees for court, attorney, filing, appraisal and executors and/or conservators. It is usual for fees to amount to as much as 10 percent of the estate and in many cases much more. Sometimes it is necessary to sell estate assets to cover probate cost.
4. Safety
Insurance companies are required by regulation to maintain reserves to the extent of expected withdrawals. The insurance rating companies investigate insurance companies regularly to assure they have maintained the financial stability necessary to protect their ratings.
5. Liquidity
Deferred annuities usually have a withdrawal provision after the first year that allows the owner to make penalty-free withdrawals of up to 10 percent of the principal or, in many cases, the account value.
6. Guaranteed Income for Life
Annuities can provide a guaranteed income stream for a lifetime, depending on the settlement option chosen. The owner has the ability to choose from one of several settlement options, including payments for a specified period, or income for life‑no matter how long. With non-qualified fixed annuities, a portion of each income payment is considered return of premium and is not taxed, thus reducing the tax liability. An annuity maximizes the use of retirement funds and guarantees them to last a lifetime.
7. No Management Fees
Investments, such as variable annuities, stocks, bond and mutual funds, assess management fees, sales fees and miscellaneous expenses. The cost of administering a fixed annuity is built into the product. The only additional cost to the consumer is if the policyholder chooses a rider, such as an income, death or family endowment rider.
Of the money invested, 100 percent earns interest immediately. The investment and management of the account is the responsibility of the insurance company.
In variable contracts and mutual funds, the investment risk is borne by the investor. With annuities, the investment risk is borne by the insurance company.
With annuities, the amount of premium payment, the type of premium, the persons involved, and the payout methods are all the decision of the owner. A great amount of flexibility is available to an annuity owner.
9. Tax Timing
In addition to deferring taxes and earning interest on money that would otherwise be paid in taxes, the investor may also exercise control over the timing of the payment of taxes.
In early retirement years, there may be sufficient income from other sources without withdrawing annuity funds. If additional income is not needed from the annuity, or if the goal is to delay taxation until later retirement years when taxable income may be less, distributions can be postponed.
NOTE:Annuities funding qualified accounts may have minimum distribution requirements.
10. Tax Favored Income
In the payout phase of an annuity, the payments are split between the return of premium and gain. This is accomplished by using the exclusion ratio.
For example:
• A. Assume that $100,000 paid in grew to $150,000.
• B. Assume monthly payments of $1,500 based on the settlement option chosen.
In this example, $1,000 would be return of premium (not taxable) and $500 would be gain (taxable). Therefore, only 33 percent ($500) of the income realized from the annuity income would be subject to income taxes.
11. Guarantees
An annuity guarantees the return of principal plus the guaranteed interest as long as there are no early withdrawals and surrender charges are not incurred. Typically, fixed annuities have minimum guaranteed rates. These are guaranteed in the contract and reflect the minimum rate that can be credited to the annuity account.
12. Medicaid Qualification
Certain annuities can be made irrevocable and cannot be converted to cash. This type of immediate annuity may provide an income stream to the non-institutionalized spouse, a portion of which may not be counted for Medicaid qualification. Properly structured, this annuity can provide income that is outside the spend-down requirements. It may be considered an unavailable asset if it is placed under an irrevocable settlement option paying principal and interest in equal installments. To qualify, an annuity must be in the payout period prior to applying for Medicaid.
CAUTION: States have different requirements and agents should use caution when advising on Medicaid qualification. It is always good practice to consult an elder care attorney when dealing with Medicaid.
13. Develop Income With 100 percent Tax Dollars
Tax-deferred annuities allow interest on tax dollars to accumulate, providing future income on the money that would have been paid in taxes. The annuitant can have a lifetime interest income, and may never have to pay taxes on the funds that provided the income.
14. Diversification
Annuities may provide the necessary diversification for portfolios that include riskier investments. They provide the safe and stable income account to balance the portfolio.
Keep in mind there is no typical senior; however, there are commonalities. It is helpful to understand the similarities and to respect the differences when working with seniors. Seniors tend to focus on how a situation makes them feel. Their responses are based on their total life experiences. So keep in mind that their number one fear may be loss of independence.
“Independent living is not doing things by yourself–it’s being in control of how things are done.”
Judith Heuman
About the Author
Lloyd Lofton, CSA, LUTCF, is the chief operating officer of American Eagle Financial Services Inc., Smyrna, Ga., a national marketing organization. He is a Georgia Department of Insurance-approved continuing education instructor in annuities. He has hired thousands of agents and hundreds of managers over the years and can be reached at [email protected] or through www.linkedin.com/in/lloydlofton.
The scale of the ethical challenge facing pension providers can be neatly illustrated by the fact that most people completely misunderstand what a pension is. Most people think of it as the monthly payment they receive after retirement, when in fact, it’s the product into which savings are accumulated prior to retirement. This misunderstanding can of course be quickly sorted out as the person nears retirement, but nevertheless, it is symptomatic of the gap between those who manufacture pension products and those who buy them.
Simplication should also bring about a revolution in pensions and annuities language. Policies have previously been written mainly with the financial planner in mind, but as adviser firms orientate their business towards those more able to pay their regular fees, a gap is opening up around those with small to mid sized pension pots. More simply worded policies help fill that gap: they’re more easily designed with a target market in mind, more easily understood by that target market, more easily sold on a direct basis and if necessary, more confidently bought on an execution only basis.
