We think that every industry can help improve the service that the client receives by sharpening the skills of the professionals who do the work on a daily basis. This is part of our series for Life and Health Insurance Agents that looks in depth at E and O insurance claim scenarios.
An Errors and Omissions Case Study
Client John, a 55-year-old salesman, contacted an Agent to review his existing annuity contract. The Agent was recommended by a friend of John’s. John owned a variable annuity he purchased in 2005 with a $200,000 initial investment. The annuity included a GLWB (Guaranteed Lifetime Withdrawal Benefit) rider, which offered protection from market fluctuations and a lifetime guaranteed income stream once triggered.
The guaranteed lifetime withdrawal benefit is determined from the “benefit base” of the contract. The benefit base is established at the time of purchase and equals the amount invested. With this particular rider, the benefit base grew every year by a minimum guaranteed 6% regardless of how market performance affected the actual account values. It also had a “ratchet up” feature that allows the benefit base to step up and lock in at a higher amount if the growth in the account values goes above the benefit base.
John purchased the annuity primarily for lifetime income at retirement. In this case, John’s benefit base and account value had increased to $230,000 before the account value plummeted to $100,000 after the 2008 financial crisis. While the account value rallied back to $175,000 in the last few years, John was happy with the recovery but with another 10 years before retirement, John wondered if he could do better. John asked the Agent to evaluate his options.
The Agent sells different annuities that also include minimum guaranteed income riders with a 6% introductory guaranteed benefit base rate of return that drops to a minimum 4% after the first 2 years. The annuities he has sold over the last several years have performed better than John’s with respect to account value growth.
The Suggestion In Question
The Agent suggested to John that he could offer an annuity that has a better track record of performance, more sub-account options, and a guaranteed income rider, and a 10% signing bonus (The new company would contribute 10% of the investment value to the purchaser’s account). Because John had held his existing annuity for many years, he faced no surrender charge to roll it over into the Agent’s newly offered contract. The new contract had a surrender charge schedule for the first 7 years.
The Agent believed this was a good move for John because of the 10% bonus, similar guaranteed income benefits and the better investment options within the sub-accounts. The Agent thus convinced John to roll over his current contract into the new contract. The roll over amount was the $175,000 account value plus the 10% bonus ($192,500 total).
Two years later, after flat market performance, the account value of the new annuity was basically unchanged. The benefit base increased by 6% per the guaranteed rider rate. John mentioned this to an acquaintance, who happened to be an advisor.
John explained that his prior annuity had a benefit base rider and he thinks it may have been more valuable than his new contract’s rider. However, he was convinced to roll over the annuity because of the attractive signing bonus. This new advisor prepared a comprehensive comparison of John’s old and new contracts.
Unhappy client says new annuity ‘unsuitable’ and files claim
The advisor determined that the benefit base of the old contract was substantially higher than that on the new contract and would have continued with a 6% minimum rate of return on the benefit base; the new contract’s minimum guarantee had just dropped to 4%. In addition, the fees charged on the new contract were .5% higher than the old contract. Based on conservative projections, the advisor concluded the old contract’s income stream was worth several hundred dollars more per month than the new one.
Because retirement income was his main goal, John filed a claim for negligence and unsuitable replacement of the annuity contract. He believed that the Agent did not provide a complete picture of the pros and cons of this switch.
What can we learn?
- Have a formalized and effective process for comparing a client’s existing annuity and insurance products and the proposed replacement products. The starting point is to gather the underlying contract itself, and read through the contract details and the associated riders. Because companies try to differentiate themselves, particularly in the annuity market, the contracts can be unique. Providing side-by-side written comparisons can be a good tool to ensure you and your client know the benefits and tradeoffs of making the switch.
- Make a list of your client’s priorities. Be sure to explain all the options available under the contract and explain which benefits are guaranteed and which are not. Make sure you are selling the product on what it will do and not just what it might do.
- Explain in writing the costs (including fees) associated with the various benefits, and if you are replacing one contract with another, compare those relative costs as well.
Annuities and their options can be complex and varied. If you are not experienced with the nuances of annuities and the various riders offered, seek assistance from the product’s sponsoring company or more experienced colleagues.
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.