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With Older Seniors, Advise According To The Worst-Case Scenario

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Questions from agents about selling life insurance and annuities in the senior market continue to amaze and disappoint.

“Senior market” here refers to true seniors–those over the age of 80.

The questions tend to fall into two categories. For life insurance, the story goes something like this: The agent says the customer “does not need” a certain sum of money. That sum is usually very accessible, such as a low-interest-bearing bank account.

Rather than allow that money to sit in the bank and accumulate interest that is taxable, the agent proposes taking the money and buying a single premium life insurance contract.

Even though the margins are not that great, depending upon the assumptions made, usually the agent can show that: 1) the money can be increased at death with a nice return; 2) meanwhile, the cash values will be accumulating tax-deferred; and 3) at death, the proceeds will be received free of income tax.

In addition, the agent may show that the single premium may be enough to purchase a guaranteed death benefit, without the need for any further premiums.

Let’s look at this transaction more closely. When the agent says the customer “does not need this money”–or even if the customer says that–what does it really mean?

From the attorney’s viewpoint, it means the agent thinks the customer does not need the money now to live on and presumably will never need it. So, the agent believes tying the money up in a single premium contract is justifiable, supposedly, even though the cash values initially are greatly reduced from what is available at the bank.

Moreover, we often see that the money that supposedly is not needed comprises a large percentage of the customer’s assets. For instance, many seniors have learned to live on Social Security, their company pension and perhaps an IRA. That often leaves large sums of money tantalizingly sitting in those low-interest-bearing bank accounts.

The problem that we see with this approach is that at such an advanced age, a person’s situation can change drastically at any time.

A disease, for example, that may not be fully covered by health insurance, particularly a treatment that may be considered experimental–and therefore not covered–can use up the nicest nest egg. At that point, the money in the single premium contract may, in fact, be very much needed.

Of course, then, unlike when the customer was younger and working, the customer lacks the flexibility to accommodate this sudden need. So, when the customer tells the agent that he or she does not need the money in the bank to live on, the customer may not be considering the worst-case scenario. But the customer’s lawyer will probably see that scenario–and, I submit, so should the agent.

In any case, even if the customer fully appreciates the situation, the money tied up in the single premium contract should not be a significant portion of the customer’s assets. What that means depends upon the individual situation, but certainly, more than 10% should bear close scrutiny.

The second kind of senior market question that comes up involves annuities–specifically, moving money from one annuity to another, in a tax-deferred Section 1035 exchange.

In these situations, agents also often say that “this money is not needed by the customer.” This is the rationalization for explaining why the loads and surrender charges on the new contract are not important.

Not important? Wait a minute there.

If the surrender charges extend for even just five years and the customer is more than 80 years old, the surrender charges may well extend beyond his or her lifetime.

Again, even though the customer may not need the money to live on today, no one can know what the situation will be next year or even next month for that matter. Even the “free withdrawal” provision in the contract, which typically allows the annuity owner to withdraw up to 10% of the cash value each year without a surrender charge, may not be enough. I believe that it is the agent’s responsibility to think of this worst-case scenario.

In addition to what might be considered as a common sense approach as above, another consideration is that the regulatory authorities have been sensitized to these sales. Often the senior buyer does not understand that the new contract will have restrictions and that the money will not be readily accessible, as it was, for example, at the bank–or even as it was under an existing annuity contract, under which the surrender charge period had long ago expired.

The authorities thus have encouraged insurance sellers to scrutinize sales to seniors carefully (meaning customers 65 and over!). In some cases, regulators have taken action to punish such sellers for inappropriate market conduct.

As an attorney, if my client wants to take an action that I believe is foolhardy, I have a choice–I do not have to help the client take that action. Even though the client may just go somewhere else to get assistance, at least I know that if I think the unexpected may occur–as it often does–the bad results are not on my conscience, not to mention my malpractice experience.

There are some risks that customers just should not take. If the customer cannot afford to risk all of his or her savings at a Las Vegas casino, because the customer would not have any money to live on, then the customer should not be taking that risk.

In other words, when a client asks me the likelihood that something will happen, I don’t think that question is valid unless the client can afford to suffer losing the bet. The same is true with financial planning. If the customer cannot survive if the life insurance or annuity money is needed, then the client should not undertake that transaction.

The agent should take the same approach. As with my own legal clients, this may result in lost revenue for the agent. But agents should know that customers often think very carefully before undertaking a transaction for which the trusted advisor–in this case the agent–is willing to forego a commission because the agent feels so strongly against the transaction.

Sometimes actions speak louder than words, and this is one of those times.

So, when senior prospects are sitting across the table, agents should consider the worst-case scenario–and act accordingly. This will likely earn the agent the respect of the customer, and of the customer’s friends and relatives who learn of what the agent did–or, rather, refused to do. It will also identify the agent as a true professional, not a stereotypic product pusher.


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