Bad Apples_ Annuities And The NAIC by pengtt



Bad Apples, Annuities And The NAIC
BY DANNY FISHER                               agent does what’s best for the client                What’s wrong with making more

      S THE SAYING GOES, A FEW BAD            instead of what’s best for the insurance         money? There’s nothing wrong with
      apples can spoil the whole barrel.      company.                                         making money, but the insurance
          Texas is one of 14 states that          I don’t really believe the NAIC is           business is based on the three-legged
have adopted the National Association of      trying to nail honest, professional agents       stool concept. The product has to be fair
Insurance Commissioners’ Replacement          to the wall. I do believe the NAIC is            for the client, agent and insurer. Many
Model Regulation. Most other states are       trying to make it harder for “bad apple”         annuities on the street today have a short,
expected to adopt it soon. Briefly stated,    agents to do business—the agents who             bad leg for the client.
the regulation defines the responsibilities   replace contracts still within penalty               In that vein, when insurance
of insurers and agents regarding                  periods with new trash annuity               commissioners approve products for sale
replacement of existing life                        contracts. But there is a better way.      in their states, they apparently have a
insurance and annuities.                                     Professional agents always        problem telling the difference between a
    One of the new hair-                                  present all relevant facts to        three-legged stool and a stool specimen.
raising requirements is for                                their clients, regardless of how        The NAIC has recognized that
an insurer, upon request, to                              many forms are required. On          unscrupulous       agents    are    selling
make records available to the                                               the other hand,    inappropriate contracts to the public, but
insurance          department                                               insurers     and   instead of removing bad products from
concerning each agent’s                                                     state insurance    the market, the NAIC just requires more
annuity contract replacements                                                   departments    forms for owners to sign in an effort to
as a percentage of the                                                      cannot create      protect the agents and insurers from
agent’s total annual annuity                                                enough forms       lawsuits. But if “trash” annuities were not
contract sales.                                                             to protect the     produced, they couldn’t be sold. If bad
    That is scary! There                                                    public     from    products weren’t sold, the vast majority
are millions of existing                                         crooks.                       of lawsuits would never be filed, which
multiyear rate guarantee                                       People who sell illegal         would reduce the need for so many
annuities that pay a set rate                             drugs are arrested every day all     “cover-your-tail” forms.
for a set number of years,                               across America. The nation                At this stage, the number of forms
after which the penalties                                 can’t build enough prisons to        required to make a simple annuity sale is
expire and the rate is subject to change.     hold all the drug pushers. The only way          ridiculous—more forms than are required
In many cases, the rate drops to the          to stop drug trafficking is to cut off the       to purchase certificates of deposit or
contractual minimum guaranteed rate,          supply of drugs. If there are no drugs,          mutual funds, for instance. What’s more,

which under the NAIC Model Index may          there are no drug pushers. The
be as low as 1.5%.                            bad annuity problem seems
    For years, professional agents have       similar. If the insurance                                    As long as insurers
sold thousands of these MYGAs, with           commissioners would stop                                are allowed to produce bad
NAIC Index minimum guarantees now             allowing bad annuities to be                           annuities, they can always
renewing at 2%. When these owners are         issued, the problem would dry                          find a pusher on the streets to
offered the opportunity to transfer to a      up overnight.                                          deliver the trash. Alas, therein
new contract earning a much higher                As long as insurers are                            lies the rub; one person’s trash
guaranteed rate for a new period,             allowed to produce bad                                 is another person’s treasure.”
virtually all make the transfer—as would      annuities, they can always                       when CDs mature in banks, the banks
any reasonably sane person. However,          find a pusher on the streets to deliver the      aren’t required to complete replacement
the NAIC has now clearly defined that         trash. Alas, therein lies the rub; one           and suitability forms in to renew the CDs.
transfer of assets as a replacement.          person’s trash is another person’s                   The NAIC has a moral and fiduciary
    Let’s get this straight: the NAIC has     treasure.                                        responsibility to protect the public, not
approved a method to pay policy own-              Annuities with exorbitantly high             only from bad agents, but also from bad
ers rates as low as 1.5%, but will monitor    commissions, penalty periods exceeding           contracts. If the commissioners want to
agents who, in its opinion, may replace       10 years and no penalty waiver at death          know how to tell the difference between a
too many of those contracts with higher       are considered trash to a whole host of          good annuity and a bad one, here is a
rate annuities. So, an agent’s insurance      professional agents who refuse to sell           simple test: “Would I let my mother put
license may now be in jeopardy when the       them. But bad apple agents and insurers          her money in this contract?” The answer
                                              look at the same annuity and consider it         will determine the quality of the annuity.
     Danny Fisher, CLU, ChFC, is founde       treasure because it pays a high
cipal of The Fisher Agency, Dallas, and                                                        NU
Fisher Annuity Index. His e-mail address
                                              commission to the agent and lucrative                                profits to the insurer.                                              February 11, 2008 | National Underwriter Life & Health | 19

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