You have known your prospect for a long time through the country club, but you have never done business with himthough not for lack of trying.
Finally, after years of polite conversation, he mentions in the locker room one day that he is revising his estate plan. He asks: “Would you like to quote on some coverage?” Naturally, you say yes.
But what to suggest?
The prospects attorney tells you to send a quote for $5 million of universal life insurance. Then, thinking you need to come up with an extra wrinkle, in order to stand out from the crowd of agents being contacted on the case, you also recommend the purchase of an immediate seven-year annuity to fund the life insurance premium payments.
This accomplishes several things for you. It locks up funds to pay the first seven premiums (an arbitrary number, you admit), so you dont have to worry about lapses during that time. It also pays you a commission on the life insurance and a commission on the annuity–not a bad arrangement. And, the customer does not have to write a check each year. The annuity payment can be applied right to the life insurance.
What could be better? If you have surmised from my tone that this strategy is not always the best choice, you are correct.
In the current environment surrounding annuity sales, and, perhaps, even in the past, two-product sales of this kind may raise a lot of questions. The primary question is whether the sale is suitable under the circumstances for the buyer.
The National Association of Insurance Commissioners recently has adopted the Senior Protection In Annuity Transactions Model Regulation. If adopted by the states, the regulation would require the insurance advisor to have “reasonable grounds” for believing a recommendation to purchase an annuity is suitable for the customer, based on facts disclosed by the customer. The regulation applies to customers age 65 and older.
For variable annuity sales, the Securities and Exchange Commission also is examining suitability, along with the duty to disclose unfavorable charges and fees, along with the favorable policy features.
In addition, in the above example, if the insured dies in the first year, the life insurance would be paid, but the annuity premium, which could be substantial, would be lost.
While your client may have understood this potential outcome and may have been perfectly happy with the result if he had been alive to talk about it, his heirs may not be as happy.
Remember: In life insurance litigation, the lawsuit is often brought by people who did not have any contact with the agent making the sale. They sue because the transaction does not look right.
And, if indeed the transaction does not look right, the agent may have a hard time convincing a jury that the sale was suitable. So, in addition to regulatory considerations, the agent may also have to defend his actions in court.