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.

In view of governmental interest in annuity sales, how would the two-policy sale fare? The answer depends on whether the agent has done the homework.

Just recommending the annuity purchase so that one stands out from the crowd is probably not a good idea. In that case, the agent has not made an effort to determine whether the annuity sale is suitable.

To make a suitability determination, the agent must ask basic questions, such as about the health of the insured, the financial status, the planning goals, etc.

Assume that the customer is 50-years-old and has $5 million of liquid assets. The two-policy sale may not be suitable for at least several reasons.

One reason is that the customer may not need to purchase an annuity to be sure he has enough money to pay the life insurance premiums.

Another reason may be that the annuity may have an expense load such that short-term accumulation is not advisable. Over the seven-year period, for example, an alternate investment, such as bonds, may have higher guaranteed returns.

Still another reason may be simply that the agent received commissions at both ends of the transaction, on the annuity and the life insurance. This “double commission” can seem excessive in the eyes of regulators or jurors.

This is not to say that two-policy sales should always be avoided. They might be appropriate in certain cases. For example, if the client pays the premiums at a certain level for the seven years, the client is assured that the death benefit is guaranteed until the date of death. Some clients want this assurance.

Also, if a customer is concerned that his or her other investments may not be profitable, the client may want to lock in a certain rate of return, combined with protection from creditors (if available under state law).

The two-policy sale also can be appropriate if the customer wants the convenience of having the annuity payment automatically applied to the life insurance.

These are but a few pros and cons on two-policy sales. The takeaway for the agent is to be sure to explore a customers situation before making a recommendation of this (or any other) planning solution. This exploration enables the agent to determine whether the customers needs can be addressed with an annuity sale.

Failure to do this may result in the agent standing out from the crowd for the wrong reasons–like having his name in the newspaper for a regulatory or legal action.

Douglas I. Friedman, a partner in the Friedman & Downey, P.C. law firm of Birmingham, Ala., is national counsel on estate and business planning for insurers. His e-mail is doug@fdatty.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.