Annuity & Universal Life Mismanagement

What Is Annuity Fraud?

Perpetration of Annuity fraud often comes against senior citizens. The following circumstances are red flags of possible annuity fraud:

  • The investor is unlikely to live long enough to receive annuity payments
  • The annuity or annuities comprise more than 35 percent of the investor’s assets
  • Selling an existing annuity to purchase a new annuity for no good reason
  • The annuity is in a tax-deferred account
  • The annuity has costly features the investor does not need or want (e.g., death benefit when investor already had sufficient life insurance).

Annuity Sales Practices

A FINRA rule governs sales practices for deferred variable annuities:

  • First, the law requires that the annuity recommendation be suitable for the customer.
  • Second, it requires a review of the sale by a principal of the firm before the customer’s application is forwarded to the issuing insurance company for processing.
  • Third, the rule requires member firms to establish and maintain written supervisory procedures to ensure compliance with the requirements of the law.
  • Fourth, member firms must develop and document training programs to ensure compliance with the requirements of the rule and that the selling brokers understand the complexities of deferred variable annuities.

Life Insurance Sales Practices

State laws govern sales practices for insurance policies. In general, agents may not engage in any deceptive practices relating to the sale of life insurance. The Georgia code specifically prohibits misrepresentation in any estimate or illustration of the terms, benefits or dividends of any policy.

Churning – using deceptive sales practices to induce a customer to sell an existing policy and use the proceeds to purchase a new plan for no good reason to receive a commission – is a common deceptive sales practice. Likewise, an agent cannot knowingly accept applications with misrepresentations. All material facts relevant to the risk known to the agent, or which could be identified by “proper diligence,” must be incorporated into the application.

Most states have statutes that prohibit unfair claims settlement, such as:

  • Misrepresenting material facts to claimants and insureds;
  • Failing to acknowledge a claimant’s communications promptly;
  • Failing to adopt and implement procedures for prompt investigation and settlement of claims;
  • Failing to quickly and fairly settle claims for which the insurer’s liability is reasonably clear;
  • Requiring insurers to file suit to recover amounts due them;
  • Failing to affirm or deny coverage of claims within a reasonable time after the insured has requested the insurer to do so;
  • Failing to provide a logical and accurate explanation of the basis for a denial of the claim.

Insurance Fraud Is Prohibited by Statute in Georgia

Insurance fraud can rise to the level of criminal liability. A person who commits insurance fraud will receive a charge of a misdemeanor or a felony.

In addition to state legislation, certain insurance sales practices are prohibited as discriminatory by two federal statutes – the Americans With Disabilities Act and the Fair Housing Act.

How to Spot a Bad Life Insurance Plan

The insurance company is has a low rating in terms of its financial strength and claims-paying ability from A.M. Best or Standard and Poors compared to the better-rated companies.

Call your state insurance commissioner. Are there any complaints against the company? Is the company licensed and part of the guarantee fund that covers insureds whose valid claims are not paid by the insurance company?

ERISA Fiduciary Litigation

ERISA requires that Summary Plan Descriptions or SPDs be distributed to participants covered by the plan within specified time limits and upon demand. Employers must distribute SPDs by ERISA, and those SPDs must accurately describe the terms and conditions for obtaining benefits under the plan.

Failure to provide accurate and complete plan-related information to plan participants exposes employers, which are plan fiduciaries, to potential liability. As shown below, an employer that fails to provide an SPD or copy of the group insurance plan may be ordered to pay life insurance benefits that were not covered by the policy.

Recently, an employer’s failure to provide distribute a copy of its group life insurance policy or SPD resulted in a court ordering the employer to pay a claim when there was no coverage under the policy. In Snitselaar v. Unum Life Ins. Co. of Am., in the federal district court of Iowa, the facts of the case were as follows: An employee had enrolled herself and her spouse in the employer’s group life plan. The employer represented to the employee that, after a two-year waiting period, she would not lose coverage for “life changes” (like a divorce) and omitted to inform her that divorce would affect the coverage.

The employer also failed to provide an SPD or a certificate of insurance to the employee. The employee signed on to the group life insurance and subsequently divorced her husband. After the divorce, the ex-husband died. The employee filed a claim for life insurance on her ex-husband.

The carrier denied the claim on the ground that the policy required that the employee be married at the time of death to receive benefits for a spouse. The court agreed that the policy terms supported the denial of the claim, so the insurance company was let “off the hook.” However, the court ordered the employer to pay the employee $60,000, which was the full amount of the lost life insurance benefit.

Why? Because the employee had filed a breach of fiduciary claim against her employer for failing to provide her with an SPD and certificate of insurance, and that was why she was unaware of the plan’s terms.

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