John E. Girouard
Forbes.com 07/28/09
Technicalities and sometimes outright treachery can leave annuitants and policyholders holding the bag and little else.
As people dig deeper into their pockets to weather the recession, many are turning to their life insurance and annuity contracts only to discover “gotcha” clauses that are the envy of the credit card industry.
John E. Girouard
Forbes.com 07/28/09
Technicalities and sometimes outright treachery can leave annuitants and policyholders holding the bag and little else.
As people dig deeper into their pockets to weather the recession, many are turning to their life insurance and annuity contracts only to discover “gotcha” clauses that are the envy of the credit card industry.
Too often, and without notification, large publicly held insurers are using technicalities like a single late payment to void guarantees and benefit payments. In three decades as an investment adviser and financial planner, I’ve seen my share of shameful corporate behavior, but even I am stunned at the calculated loopholes buried in the fine print that allow insurers to avoid paying benefits.
Even many insurance salespeople I meet have no idea that the products they sell contain these potential land-mines. The insurance companies that they represent are obliged to earn a profit for their shareholders, but they often treat policyholders with careless indifference at best, and callous manipulation at worst.
It’s a frequent occurrence these days. A client comes to me for help tapping into an insurance cash benefit only to discover they’d lost it, or had it taken away on a technicality. One client had purchased a variable annuity with a rider that guaranteed a minimum income benefit. She paid a single premium of $100,000 in return for a guarantee of $5,000 a year income for life. Before getting her first check, she received a call from someone at the insurance company asking if she wanted the $5,000 a year to be gross or net of taxes. In budgeting her expenses, she hadn’t considered that the company would be deducting income taxes, so she’d have a cash shortfall.
Instead of calling me for guidance, she decided it was a minor clerical issue and told the insurance company she’d rather receive $5,000 net of taxes. She gave permission to raise the monthly payment to compensate for the withholding requirement. What she didn’t know, and what the company failed to point out, was that raising the guaranteed benefit triggered a provision buried in the contract that voided the guarantee if the gross payments exceeded $5,000 a year. The guaranteed annuity she thought she’d purchased had been gutted of its most important benefit before she’d deposited her first check.
This is just one of many ways the shareholder-owned insurance companies play gotcha! (Mutually owned insurers return profits to policyholders, as opposed to investors.)In another case, an insurance company is refusing to give one of my clients the guaranteed return it promised in the contract for which he’s been dutifully paying premiums for ten years. When I called the insurer to try to resolve the problem, I was told that the policyholder wasn’t entitled to the minimum rate of return because, on the day the contract was issued in Maryland, the state insurance commissioner hadn’t yet officially approved all the contract’s provisions.
I was dumbfounded. Was I hearing this correctly? The insurance company salesman had sat in my office, knowing almost all of my clients lived in Maryland. The company had accepted the application from a policyholder living in Maryland. Not once along this route to sucking in premiums from my clients did anyone raise a question on the fuzzy regulatory status for Maryland residents. Now, a decade later, the company is using this gap, which it failed to disclose, as the basis for denying a benefit to a policyholder who kept up his end of the bargain.
I checked state records and learned that the provision in question was approved just one week after my client signed his contract. The insurance company is sticking by the technicality, and I feel just as betrayed as my client. It is shameful but it is happening.
Policyholders should know that these insurers are playing hardball without much regard to reputational damage, so don’t expect that they will be very forgiving of tardiness in payments. In some life insurance contracts that offer guaranteed minimum death benefits, a premium payment received ten or more days late will void the guaranteed minimum death benefit. Even if the minimum premium payments are all made on time, a policyholder can still lose the benefit guarantee if he or she taps into the cash value for a loan.
Insurers get away with all of this because there is no effective arbitration process that doesn’t require a major legal expense for the policyholder. To challenge an insurer’s decision, a policyholder must file a complaint against the salesman or adviser who sold the annuity, even though they may not hold that person responsible. The salesman or adviser can’t appeal to the company he represents, or become a whistle-blower, without repercussions. So the company dodges a liability and leaves people like me to take the heat.
Insurance products that have become so complex that it is nearly impossible even for someone with experience to compare one to another. Most insurance agents have no incentive to understand the risks in the products they sell, or to be able to evaluate whether a particular annuity is going to perform as the brochure promises. They are trained to talk only about the features, not how you can lose them.
The job falls to investment advisers and financial planners to watch out for their clients’ best interests. Annuities can be wonderful vehicles for people who want predictable income, but it behooves investment professionals to grill insurance professionals to understand how their contracts work and how policyholders can potentially get into trouble.
There are two principal changes that the insurance industry should make:
1. Standardize products: In much the same way that Medigap coverage became standardized in 1992 because there was so much confusion between plans, basic annuity products with guarantees need more uniformity in their brochures, advertising and prospectuses so that investment professionals and their clients can make informed comparative choices.
2. Ease arbitration access: The industry should be responsible to both the agent and the client for providing false or misleading information in their business practices, since both pay a price when things go wrong. A conflict resolution mechanism is needed so conscientious representatives can plead on behalf of clients without companies taking revenge. Companies would have to change their contracts to perform as promised.
John E. Girouard is author of “The 10 Truths of Wealth Creation,” CEO of Capital Asset Management Group in Bethesda, Md., and founder of the Institute for Financial Independence, a provider of education programs to financial professionals.