By Linda Koco
Last week’s detailed consumer alert from National Association of Insurance Commissioners may have stirred the pot a bit in the annuity ranks.
Even though the alert is directed to retired military veterans, not all consumers, and even though it says it will provide veterans with some “tips for evaluating” important decisions regarding putting money into financial products, some in the industry are concerned that the warnings about annuities might be misleading for veterans and the general public.
At issue are warnings included in the document about using annuities — in particular, deferred annuities – to help low-income wartime veterans qualify for a government pension. These warnings are in addition to cautionary notes about gifting and moving money into trusts, checking an advisor’s accreditation and licensure, deceptive sales practices and marketing practices.
Shot across the bow?
“When I first read the alert, I thought that the National Association of Insurance Commissioners (NAIC) was taking a shot across the bow at special programs that target veterans,” says Christi Daughenbaugh, president of Borden Hamman Agency, a brokerage general agency (BGA) in Dallas, Texas.
She got that impression because the alert focuses its attention on veterans who turn to “financial and estate planning services that are accredited by the Veterans Administration (VA) to assist veterans and their families in accessing pension benefits to help with their future care.”
The issue raised by the NAIC? “Some of these insurance agents, financial planners and lawyers are taking advantage of veterans by putting their money in financial products that may not be suitable for the veteran,” the alert says, citing a recent Government Accountability Office (GAO) Report.
Those statements “made me wonder if some bad apples may have surfaced among those marketers,” Daughenbaugh says.
There is nothing wrong with special marketing programs that are designed to serve veterans, the BGA adds. But maybe some bad practices were surfacing and the NAIC was trying to head that off. “If so, the alert is not out of order,” she says.
When Daughenbaugh studied the alert’s comments about annuities, however, she became concerned. “Some of the statements seem misleading,” she says.
In a section on investing in annuities, the alert says that, “according to the GAO report, some planners were placing senior veterans in products that may not be age-appropriate because the veteran may lose access to funds needed for future expenses.”
Then the alert puts the spotlight on sales of deferred annuities in this marketplace.
“Some organizations may sell deferred annuities to an applicant that would make their funds unavailable to them during their expected lifetime without facing high withdrawal fees,” the NAIC document says, again citing the GAO report.
The alert does allow that “There are annuity products that could be appropriate or useful to a veteran who is looking to receive a monthly income beyond their pension.”
However, it continues, “a deferred annuity is structured so that payment for the premium investment is not received for several years and withdrawing funds from it early can be very costly. This kind of annuity would probably not be desirable for an older veteran.”
Why it’s misleading
The statements about deferred annuities seem misleading, Daughenbaugh says, because “they seem to imply that it is never appropriate for an older retired veteran to purchase a deferred annuity.”
It is true that deferred annuities have surrender charges if policyholders pull their money out early, she says. But certificates of deposits are structured that way and so are other products that people buy in and for retirement. “The products are set up so that, if you take the money out early, there will be a charge.”
Veterans should be careful and understand the limitations in annuity products, as should all consumers, the BGA says. But the alert seems to generalize about investing in deferred annuities, she says.
“If a veteran has a portion of funds that the person won’t need for a long time, it might be appropriate for that particular veteran to put the money into a deferred annuity,” Daughenbaugh explains. “But this is provided that the veteran understands the pros and cons of what the veteran is buying, and that the advisor has asked enough questions about the customer, understands the circumstances of the individual and knows what the person is trying to accomplish.”
For example, before making a recommendation, the advisor will need find out if the veteran has enough liquidity, she points out. And, if the veteran is trying to set up a monthly income, the advisor may want to consider using a single premium income annuity instead.
“The point is, the alert needs balance. Deferred annuity products are not bad, and veterans don’t need to be afraid. In some cases, the deferred annuity might be best, regardless of age and if the customer is a veteran. Look at the specifics. Don’t generalize. Be rational. And do what is best for the client.”
The NAIC alert touches on a couple of those points in a checklist that also appears in the alert. It says:
· “Remember, an annuity is not an investment product to help reach a short-term financial goal.
· “Before signing a contract for an annuity, it is important to understand the terms of the contract, how any money is invested, and when the benefit payments will begin.
· “Get educated about annuity choices and the deceptive practices that can be used when selling annuities in this consumer alert.
· “Report suspected deceptive sales to the state insurance department.”
Lee Covington says the Insured Retirement Institute (IRI) encourages all consumers to gather as much information as possible when making financial decisions. He is senior vice president and general counsel with the Washington, D.C., trade group.
Furthermore, he writes in an email, “we support in all states the adoption of the NAIC Annuity Suitability Model, NAIC Annuity Disclosure Model and NAIC Senior Designations Model, as well as FINRA’s annuity suitability rules.”
Covington does not comment directly on the alert, but he does note that the above models “all require sales practices that provide suitable financial products given an investor’s individual holistic retirement situation. And, we expect financial professions to provide advice in a manner that meets the requirements of these important laws and regulations."
As for veterans, “we owe an enormous thanks to and respect for our nation’s veterans,” Covington writes. “Given their service to our country to protect us all, our industry and its regulators should ensure they, like all consumers, are protected and receive good financial advice during their later years.”
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].
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