Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Retirement Planning > Retirement Investing > Annuity Investing

The Right Fit

Your article was successfully shared with the contacts you provided.

The saga of Glenn Neasham has elicited passionate responses on both sides of the aisle. A word that gets thrown around when discussing his sale of the MasterDex 10 Annuity from Allianz (MasterDex) to a then 83-year-old, dementia-stricken Fran Schuber is “fair”. You are either of the belief that what Neasham did to Schuber was unfair or what prosecutors did to Neasham (convicting him of criminal theft of the elderly) is. What certainly is not fair to either Neasham or Schuber is that people both inside and outside the industry are discussing, lobbying and decision-making “without knowing a hell of a lot about what is going on,” as annuity expert Jack Marrion said.

The MasterDex Annuity from Allianz was cleared and sanctioned by the California Insurance Department to be sold to someone up to age 85. In Allianz’s own parlance, it is “designed for someone who is interested in accumulating funds on a tax-deferred basis for a period of five or more years and then taking the money out in periodic payments for ten or more years up to their lifetime. The MasterDex is also used by consumers who do not intend to ever access the money themselves, but whose objective is to accumulate funds to be transferred to beneficiaries.”

The Nuts and Bolts

The MasterDex first issued in May of 2004, and works like most any equity-indexed, fixed annuity product. A contract is drawn up between the owner and, in this case Allianz, and premiums begin to be paid to the insurance company. With the MasterDex, upon purchase you receive a 10% bonus on premium received for the first five years (hence the 10 in its title) and the annuitant can then receive indexed interest based on changes in either the S&P 500 or the NASDAQ 100. The product prides itself on facilitating the accumulation of funds, and when the market moves up, the value of your MasterDex increases. Annuitants are able to “get full 100% participation in potential monthly gains” subject to an established monthly cap.

Being able to access their money if a tragedy strikes is a feature that customers look for and the MasterDex allows customers after 12 months to withdraw 10% of their total premiums without a surrender charge or market value adjustment. Owners are able to do so until they withdraw 50% of their total premiums. So, if Fran needed the money to pay for a stay in a long-term care facility or in a hospital, she would have been able to access it.

After five years of paying premiums to Allianz, annuitants are able to receive the full value of their investment vehicle by choosing an income stream over the lifetime of the annuitant or lasting 10 years or longer. There are myriad options for annuitants to receive payments, from interest-only payments to installments guaranteed for a period of 10 to 30 years. Annuitants can choose to receive installments for life, where one would receive payments in equal installments for the remainder of their life or bring in joint and survivor.

One need not assume that Fran, under the advisement of her then boyfriend, was not planning on taking payments until she was 113. Fran most likely would have named a beneficiary when her health and her mental faculties took an even sharper turn for the worse. In which case, the MasterDex provides a death benefit (which it should be noted cancels out surrender charges) payable to the beneficiary and if it is taken over the course of five years, the payments would be based on the contract’s full annuitization worth. If the beneficiary were to decide to access the investment vehicle as a lump sum, the death benefit would equal the sum of the premiums paid less withdrawals or the cash surrender value which equals 87.5% of all premiums paid minus withdrawals accumulated at an annual rate of no less than 1.5%.

The product also contains a rider which allows the named beneficiary to receive the death benefit tax free up to 28% taxable gain although there is a charge for the rider to be installed.

The California Insurance Department looked at the intricacies and the qualities of this product and decided it was suitable to be sold up to age 85. Allianz looked at the individual and decided that Fran was a good fit for the product. But because Glenn Neasham could not or did not conclude that Fran had dementia, he has been forced to bear sole responsibility for the sale.

Industry Expertsí Input

Many people outside the medical world believe that dementia is a blanket term, used to describe the vague senility and the dulling of cognitive functions over time. It does, however have a specific scientific definition. According to the 1984 handbook Dementia: A Clinical Approach by J.L. Benson and D.F. Benson, dementia is an acquired persistent compromise in intellectual function with impairments in at least three of the following spheres of mental activity: language, memory, visiospatial skills, personality and cognition. By that definition, it includes those affected by Alzheimer’s disease, senile dementia, and vascular dementia. A person with dementia is generally not considered to have the legal capacity to enter a contract.

Selling annuities to seniors has been on Jack Marrion’s radar since the summer of 2009 when he wrote a report entitled Helping Seniors Make Wise Decisions About Annuities. The report was designed to assist agents in selling annuities to elderly people. Marrion, who heads annuity consulting firm Advantage Compendium, was aware that agents needed a guide to help them navigate sales to elderly people. The report indicates that the risk of selling annuities to elderly people had been on the minds of industry-watchers and producers since at least 2009. A new report by Marrion, Addressing the Challenges Created by Cognitive Changes in Seniors, was commissioned by NAFA and was triggered exclusively by the Neasham event. “A year ago exactly, I mentioned the previous study that I did on this in which it was found that half the people over age 80 either have dementia or have cognitive impairment,” Marrion says. “At the time it was like, ‘Interesting. You should be aware of this.’ But now it’s like, ‘Interesting, you could go to jail.’”

Marrion has even had four agents from California that have contacted him and said that they will either not sell an annuity to anyone over 80 or if they do they will require their own homemade forms for someone to sign stating that they don’t have dementia. Those are drastic steps and it should be noted that someone with dementia signing a document saying that they don’t have dementia might not have much credibility. However, instances like these can testify to the insulation and self-preservation that this case has caused agents to feel. A legitimate question to raise: who is this helping and who is this hurting? The agents are losing sales and someone in their 80s that is cognitively intact and wants to purchase an annuity to build income may not get the product they need because agents are scared to sell to them.

Noel Abkemeier, an actuary with Milliman, feels that the MasterDex really operates in the deferred annuity world and it is designed for people that want to invest their money and want to get a good return. “One thing that differentiates the MasterDex and maybe other Allianz products from those of other companies is Allianz says ‘Ok, give us the money and you have these guaranteed annuity rates in the contract and as a current practice we offer higher rates if you choose to annuitize.’” Abkemeier maintains that most people put their money into the MasterDex with an investment and accumulation mentality and if the time comes to take income they may, but not too many have. The MasterDex has a structure that says if you want to take your money out and get full value you have to annuitize and “this requirement of annuitizing if you want to get full value differentiates it from other companies that don’t have such a requirement so, the alternative is you can take something less if you want it in a lump sum. “ You are not getting your indexed interest if you chose a lump sum. There is a tradeoff of how easily you can get your money but you get more “value if you stick around,” according to Abkemeier.

Insurers in general, when they sell annuities, aim for a market that starts at 55 and slims out at age 80. The core of the market in the indexed annuity world is 65-75. And the selling point is managing money in your retirement years in two ways: getting accumulation and having the opportunity to convert it into an income if you so desire “And Fran is at the upper end of the spectrum but whether someone is purchasing at 65 or 83, there is not a big difference. They enter into the transaction because it is a better investment return then, say, a CD for example. People are just out to get a better return whether they are 65 or 83, Abkemeier said. Often people say ‘you shouldn’t sell something to an old person when there is a long surrender charge but I don’t think that is a good criterion; because if the death benefit erases the surrender charge then the surrender charge is a non-issue,” Abkemeier said.

What About Suitability?

There will undoubtedly be varying opinions as to whether this was the best product for Fran to purchase. However, this case is not about Neasham being in violation of the Suitability in Annuity Transactions statutes of California. Neasham was tried for theft. John Olsen, President of Olsen Financial Group said, “… the substantial restrictions upon liquidity that the MasterDex imposes might be considered excessive or unwarranted by the benefits provided (including the 10% interest bonus that is only realizable if the contract is annuitized). Those reactions did indeed form part of the charge of theft that the Lake County District Attorney brought against Neasham but do not, in my judgment, rise to the level of theft. I would very likely have testified in a civil proceedings or FINRA arbitration that the annuity sale was unsuitable but had I been asked, in a criminal court if the annuity restrictions and the commission payable to Neasham amounted to theft I would have said absolutely not. But that is a legal judgment, as to whether a given act fell within the bounds of a criminal statute. I firmly believe Neasham’s actions did not.”

Although suitability is tightly tethered to this case that is not what the case is about. If it were, the case would be tried in different venue, under different standards and would most likely result in a much different sentence.

People both inside and outside the industry have a visceral reaction when the Neasham case is described to them. They picture someone like their own grandmother with a hazy mist over her eyes, blindly chattering gibberish as Glenn Neasham’s hand guides her own until her signature is formed and the commission is his. As is so often the case, however, the truth is hardly that simple. Arguments both for and against Neasham are passionate but many are not comprehensive and they have served to fan the flames of the fire that is emotionally-based decision making.

The complex case has, after all this time and energy, left the industry and the people it serves with no clear-cut answer or code to abide by to make sure that this does not happen again. Again, the word “fair” bubbles to the surface and offers its services up to both sides of the argument. Is it fair that people in their 80s who are cognitively astute may not get the product they are looking for because agents are petrified to sell to them? Is it fair that the MasterDex 10 pays a higher commission than most index annuities, particularly when the applicant is over age 80? To both questions, the answer may be yes…and no.



© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.