Improving Your Professional Skills
We believe that an insurance professional can improve the service that the client receives by sharpening their professional skills by looking over case studies and scenarios that have lead to E&O claims.
An Errors and Omissions Case Study: The Facts
Sally was a 50-year-old who had worked for a large national transportation company for 20 years. At the time of the transaction in question, her annual salary was $60,000. Technological advancements plus a desire to reduce its workforce led the company to offer a large block of employees an early retirement package.
Sally’s package included a $100,000 lump sum incentive payout, fully paid medical benefits for Sally and her family for life, 5 years of severance pay (at 25% of her salary or $75,000 total) as well as the ability to take her pension in a lump sum if desired ($250,000) and roll it over into a qualified account without penalty.
Worried her job would be phased out, Sally was interested but concerned about whether she could afford to take the package and still meet her monthly expenses. Her company provided a detailed document describing the terms of the offering.
Sally was not sure what to do or who to trust to help her with this decision.
A friend referred Sally to an Agent that she understood to be experienced with these types of retirement packages. Sally contacted and met with the Agent to discuss her situation. The Agent indicated that he had worked with other individuals who were offered early retirement packages and would love to work with her. They discussed Sally’s goals and desires.
Sally indicated that while the idea of not having to work anymore was very attractive, she would possibly seek a new career path. However, she really wanted to know whether or not she had to work again.
Based on her monthly overhead and her husband’s income, the Agent estimated that she would need approximately $2,500 per month ($30,000 per year) to meet her expenses. The Agent indicated that he could offer her an annuity that could provide an income stream with the lump sum payout and the lump sum pension rollover. Sally still was not sure and was very uncomfortable leaving her long time job. However, after speaking to the Agent, she felt comfortable that she could afford to take the package, which she did.
The action Taken By The Agent
The Agent placed the entire retirement package in an annuity that had a 10 year surrender schedule. He then set up IRS §72(t) periodic payments of $2,500 per month.
Sally decided not to work after taking the package. However, Sally’s husband recently lost his job and they could no longer afford to pay their monthly bills. Sally is now trying to find a new job, but she has had no luck so far. IRS §72(t) allows for periodic payments on retirement monies, if they remain steady; otherwise, these payments will be subject to a 10% penalty. (The periodic payments are still subject to ordinary income tax.)
In addition, Sally cannot surrender the annuity without paying a surrender charge of 8%. Sally believes that she trusted the Agent’s advice and her money is now stuck in a rigid investment that will punish her if she needs to access her funds.
Why The Client Is Pursing An E&O Claim
Sally is pursuing a claim against the Agent for negligent advice. She alleges that the Agent advised that she could afford to take the package and could access her funds as needed to cover her monthly expenses.
She also claims that she would not have given up her long term job had she been properly advised of the risks of accepting the package and the limitations of the product that the Agent sold her.
The Agent believes he explained the product clearly, including the surrender charge schedule and the rules regarding §72(t). He also states that he thoroughly explained the pros and cons of accepting the package.
However, his file notes reflect only that he met with Sally about her options for the retirement funds and that he recommended the annuity with §72(t) distributions. As for documentation, the file contained the signed annuity application and the contract and some minimal intake notes.
His file did not include a copy of her early retirement paperwork, detailed notes regarding her monthly expenses or household income, or referencing discussions they may have had about the pros and cons of accepting such a package.
- When meeting with a client about retirement planning, particularly an early retirement, a comprehensive look at the risks associated with taking an early retirement is required. The professional’s file should reflect the details of the analysis performed with respect to the client’s current financial situation and on a prospective basis in the event early retirement is elected. Evidence that the pros and cons of such an election were discussed in detail and understood by the client is necessary.
- It is critical that the retirement planner take all available information into account, including sources of income, assets, liabilities and projected ongoing expenses (mortgage, rent, insurance costs, utilities, car payments, etc.), when making plan recommendations.In addition, the risk of something impacting these items must be analyzed. While the possibility of Sally’s husband losing his job (or becoming disabled, or ill or dying, etc.) may have been explained verbally, clear notes reflecting these possibilities and how these changes could impact the client’s situation goes a long way to defending such a claim and to ensuring that the client understands the risks associated with what they are electing.
- Besides putting a professional in the best possible positon to defend a potential claim, an additional benefit of this type of comprehensive planning and analysis is that it may lead to additional business if the client needs long term care insurance, disability insurance, life insurance, etc., as an appropriate part of their overall retirement planning.
This article/blogpost is provided for informational purposes only, does not necessarily represent Aspen’s views, and reflects the opinion of the authors in light of market, regulatory and other conditions which may change over time. Aspen does not undertake a duty to update the article/blogpost.