Chapter 1 (2024)

Chapter 4

Advertising

Any business mustadvertise to prosper and insurance is no exception. There are rules andregulations regarding how advertising may be done.

Advertisem*nts designedto produce leads from a direct response mail piece, which is directed towardconsumers age 65 or older, must prominently disclose that an agent will contactthem if that is the case. When the agent makes contact, he or she mustdisclose the fact that they are there as a result of the mailing.

It is illegal topurposely mislead consumers. This would include the use of names so similar towell-known names that it would be likely to mislead the consumer. This wouldinclude the use of symbols, initials, or other items that could be assumed torepresent a governmental agency, charitable group, or senior organization.Advertisem*nts may not use the name of any state or political subdivision ofthe state in a policy name or description. The Social Security Administrationdoes not advertise for insurance companies or insurance products and noadvertisem*nt may imply they do. Anyone representing insurance products musttruthfully represent who they are and the companies they represent.

In short, noadvertisem*nt may be printed, including business cards or stationary, to looklike a government agency, nonprofit charitable group, or senior organization.

Advertisem*nts includethe use of envelopes, stationery, business cards, and any other materialdesigned for the use of promotion of products. Business cards and other formsof stationary that are used in relation to the sale of insurance products musthave the word insurance on them as well as the agents license number.

If an agent wishes toadvertise a product they must first receive written permission from theinsurer. Agents also may not imply in their advertisem*nts that any particularclass or occupational class are entitled to reduced rates on a group orindividual basis unless it is actually true.

Some terms cannot beused at all in advertisem*nts. These include the words seminar, class,informational meeting, or substantially equivalent terms to describe publicgatherings whose propose is the sale or promotion of insurance products unlessthey also add the words and insurance sales presentation immediatelyfollowing the terms in the same type size and font.

Finesand Penalties

Californiasinsurance commissioner has the administrative authority to assess penaltiesagainst insurers, brokers, agents, and other entities engaged in insurance forviolations they commit. Penalties may also be levied in civil court.

After a public hearing,if the commissioner feels a violation has occurred, a notice of hearing must beserved upon the individual or entity that committed the violation. The noticewill state the violation committed, the time and place of the hearing, and thecommissioners intend to levy penalties. The hearing must be scheduled within30 days of the notice. Within 30 days of the hearing, the commissioner mustissue the order specifying the amount of the penalties levied. Any penaltiescollected will be deposited into the Insurance Fund.

The InsuranceCommissioner is not the only person who may levy penalties. Actions requiringthe party to discontinue specified actions, penalties specified by law,damages, restitution, and other legal remedies may be brought in superior courtby the Attorney General, district attorney, or city attorney on behalf of thepeople of California. The courts will award reasonable attorneys feesand court costs to the prevailing plaintiff who established the violation.

Penalties

Except for insurers, anyperson or entity that engages in insurance that violates the requirements of Californiais liable for an administrative penalty for a first offense of $1,000. Asecond or more offense will be penalized no less than $5,000 for eachviolation. It can be more than that, though not over $50,000 for eachviolation.

If the commissionerbrings an action against a licensee and determines that his or her actions mayreasonably be expected to cause significant harm to seniors, the agentslicense can be suspended pending the outcome of the hearing.

An insurer who violates Californialaw is liable for an administrative penalty of $10,000 for the firstviolation. An insurer who violates California law with a frequency that indicates a generalbusiness practice is liable for an administrative penalty of no less than$30,000 and no more than $300,000 for each violation. In addition, thecommissioner may require rescission of any contract found to have beenmarketed, offered, or issued in violation of California law.

ProhibitedSales Practices

While an annuity workswell for many senior Americans, there are times that it is not appropriate.California Insurance Code 789.9 states some specific prohibited salespractices:

1. An annuity may not be sold if the reason forpurchasing it is to affect Medi-Cal eligibility when the purchasers assets areequal to or less than the community spouse resource allowance establishedannually by the California Department of Health Services pursuant to the Medi-CalAct.

2. An annuity may not be sold if the reason forpurchasing it is to affect Medi-Cal eligibility and the senior would otherwisequalify for Medi-cal without purchasing it.

3. An annuity may not be sold if the seniors purposein purchasing the annuity is to affect Medi-Cal eligibility and, after thepurchase, the senior or their spouse would still not qualify. If a fixed-rateannuity is issued, the issuer must rescind the contract and refund allpremiums, fees, and interest earned under the terms of the contract withoutimposing surrender fees. This is in addition to any other remedies that mightbe imposed.

Insurance products are generallysold in the investors home. While investors do sometimes go to the agentsoffice, it is more likely that he or she will be in his or her own home. Theagent must deliver a written notice of their intent to come no less than 24hours prior to the in-home meeting. If the senior has an existing insurancerelationship with the agent and requests the meeting at their home, the agentmust still deliver a written notice prior to the meeting. If he or she comesto their clients home the same day the meeting is requested, the notice may behanded to the client upon arriving.

The content of thenotice must be in 14-point type and contain substantially the following withthe appropriate information inserted:

(1) During this visit or a follow-up visit, you will be given asales presentation on the following (indicate all that apply):

( ) Life insurance, including annuities.

( ) Other insurance products (specify):____________________

(2) You have the right to have other persons present at themeeting, including family members, financial advisors or attorneys.

(3) You have the right to end the meeting at any time.

(4) You have the right to contact the Department of Insurance forinformation, or to file a complaint. (The notice shall include the consumerassistance telephone numbers at the department.)

(5) The following individuals will be coming to your home: (listall attendees, and insurance license information, if applicable).

Upon arriving at the seniors home, the agent must state that thepurpose of the contact is to talk about insurance, or to gather information fora follow-up visit to sell insurance, if that is the case. The only thing thatmay precede this statement is a greeting. No questions may be asked until thisstatement is made. No other statement may be made. It might go something likethis: Hello Mrs. Roberts. My name is Samantha Smith. My purpose today isto talk with you about your insurance needs. Do you recall receiving thenotice I delivered yesterday regarding this?

The agent must further disclose the name and titles of any personsarriving at the seniors home with her. She must state the name of the insurerthat will be represented, if known prior to the presentation. Each personarriving at the seniors home must present her with his or her business card orsome type of written identification that states the persons name, businessaddress, telephone number, and any insurance license number.

At any time if thesenior requests that the agent leave, he or she must immediately do so, withoutfurther discussion or continued persuasion. It is absolutely illegal tosolicit a sale or an order for the sale of an annuity or life insurance productat the residence of a senior, whether in person or by telephone, by using anytype of scheme or ruse that misrepresents the true purpose of the contact.

Although this has beenpreviously stated, it should again be noted, that the term senior refers to an individual who is 60years of age or more.

Sharing Commissions With Attorneys

An agent, broker, orsolicitor who is not an attorney may not share commissions with a person who isan active member of the State Bar of California (an attorney). Californiaconsiders commission to includepecuniary (pecuniary means relating to money) or non-pecuniary compensationof any kind relating to the sale or renewal of an insurance policy orcertificate or an annuity, including, but not limited to, a bonus, gift, prize,award, or finders fee.

Unnecessary Replacement

Replacement means anytransaction in which new life insurance or a new annuity is to be purchased,and it is known or should be known to the proposing agent or insurer that thetransaction involves the replacement of an existing policy or certificate by anew policy or certificate. This would include, of course, lapses orcancellations, but it would also include converted policies to reduced paid-upinsurance, continued as extended term insurance, or other wise reduced in valueby the use of nonforfeiture benefits or other policy values. It would furtherinclude policies that were reissued with any reduction in cash value or pledgedas collateral or subjected to borrowing, whether in a single loan or under aschedule of borrowing over time in amounts in the aggregate that exceed 25percent of the loan value set forth in the policy.

An unnecessary replacement would be one thatinvolves the sale of an annuity to replace an existing annuity that requiresthe insured to pay a surrender charge for the annuity that is being replacedand that does not confer a substantial financial benefit over the life of thepolicy to the purchaser. A reasonable person would consider such a purchase tobe unnecessary.

There are severalreasons why a reasonable person might feel a policy replacement is unnecessary:

1. The surrender period on the existing policy is such that it erodes the annuity value by canceling it.
2. The new policy will enact a new surrender period that had previously been satisfied or nearly satisfied by the existing policy.
3. The replacing policy brings no new benefits or desired goals to the investors portfolio. Therefore, the investor does not substantially improve their financial picture as a result of the replacement.

How would an individual, whether it is the agent or the investor,know if the replacement improved the investors portfolio? This can beanswered to some extent by a comparison of the two annuities. Annuities oftenhave more in common than not. If they are like annuities (both fixed-rate orboth variable) it will be fairly easy to compare them. In the case of variableannuities, it is the investments that should be compared, not the insurers. Asubstantial financial benefit would be some element of the annuity that gavebetter growth, provided better annuity features that substantially improved theinvestors financial position, or moved the investor from a troubled insurer toa financially secure company. If no real advantages exist by the replacement,then a reasonable person would not consider the replacement worthwhile.

It is often felt byauthorities that annuity replacements are more for agent commissions than theyare for annuitant benefit. It really is very simple: if the investordoesnt benefit, the replacement is unnecessary.

Example:

Marthas neighbors son just became an insurance agent. Marthais a good neighbor and wants to help him. He presents his annuity product.Martha has a current annuity that is earning 4 percent interest. She purchasedit five years ago when rates were better, but she knows interest rates are downeverywhere.

The product he presents has a firstyear bonus rate of 1 percent, meaning the first year, Martha will still earn 4percent. What she is not aware of is that in the second year this annuity ispaying 3 percent, not 4. In addition, she will begin a new surrender period.

Martha does replace her policy. She pays a 3 percent surrenderpenalty on the interest earnings of her present annuity, enters a new eightyear surrender period on the new product, and will decrease to three percent inthe second year on her earnings.

Although Martha wanted to be a good neighbor, the agent certainlyviolated California law by replacing her annuity. Not only did shenot improve her circ*mstances, Martha actually caused herself financial harm.

Under CaliforniaInsurance Code 10509.9, an agent or other entity that engages in the businessof insurance, other than the insurer, who violates the replacementrequirements, is liable for an administrative penalty of no less than $1,000for the first violation. Subsequent violations are liable for anadministrative penalty of no less than $5,000 and no more than $50,000 perviolation. Since the agent was new, this is likely to be his first offense.Its a hard way to learn a lesson.

Bait and Switch Interview Tactics

Some insurance agentsare under the mistaken impression that they must hide their agenda in order towrite business. They may hold a seminar under the label of a trust seminar when,in fact, the intent is to sell types of life insurance or annuities. Or apublic meeting may be advertised as an educational experience when, in fact,the purpose is to gather names for later contact for insurance products.Bait-and-switch is the term used for these practices.

Bait-and-switch tacticsinvolve anything where deception is used. It can happen in any industry, ofcourse, not just insurance. The purpose of state requirements is to preventsuch tactics from taking place. In reality, the state can only do so much. Itis really up to all the professionals that have a stake in keeping our industryrespected to prevent such happenings. How do we prevent others from corruptingour profession? It is not easy. However, by expecting others to actprofessional, we can at least make a point that shoddy business practices areunacceptable.

Living Trust Mills and Pretext Interviews

Many states havestruggled with the problems associated with the living trust industry and Californiais no exception. While there is a legitimate place for the trust document inestate planning, when attorneys and agents have come together with the purposebeing a trust mill there is no quality of document and there is no purposefor having it at all in many cases. For the agents part, they may receivecompensation from the entity putting the trust together. Often, the trust isnever funded so there is no purpose at all for having it. If the consumerbelieves he or she no longer needs a will, great financial damage may actuallybe done.

Of ten, agents use thepretext of estate planning through a living trust to sell insurance products.The products will vary, but they often involve the use of an annuity. Theannuity is a wonderful estate tool when used properly, but consumers must beaware of what they are purchasing and make decisions based upon sound financialadvice. Neither may exist when a pretext interview is involved.

Multiple methods areused to gain the trust of consumers. It may involve a seminar that is free tothe public, using bait words such as probate avoidance, tax-exempt, orMedicaid qualifying. Whatever catch phrases are used, the purpose is to lurein the individual and gain access to their financial information. Even wheninsurance is mentioned in the advertising, the emphasis will be placed onestate planning.

Elderly consumers areconcerned with one major issue: will the need for medical care deplete theirexisting savings? Lets follow the following individual through the scenariothat might occur:

June Baker sees anadvertisem*nt in her Sunday paper for a free seminar on estate planning. Itsays space is limited and she should pre-register by calling a toll-freenumber, which she does. The individual on the other end is very personable,obtaining basic information: her name, telephone number, address, age, andprimary estate concerns.

When she arrives shefinds that she is one of many who have chosen to attend. Most are between 60and 80 years old. There are many single widowed women in attendance like her.There are two speakers: one is an attorney who discusses the living estateadvantages, using some words often (usually, most, generally). The secondspeaker is a businessman who talks about protecting oneself from Medicaidspend-down and protecting financial assets. During the final 30 minutes aspiral notebook is passed through the attendants asking each to state theirpersonal concerns.

About a week later, JuneBaker receives a call from the businessman that spoke. He was responding toher stated concerns. An appointment is set. June, who has felt very nervousabout handling her financial affairs since her husband died, is relieved tofind a person who is willing to fill his shoes. The man, James Wilson, tellsher there is no fee for his coming; it is part of the seminar services extendedto those who need his help. There will only be a fee if she determines thatshe needs any extra services.

Ultimately, June doespay fees. She pays for the attorney to draw up a trust, although she nevermeets him face-to-face. She doesnt realize it, but she also pays fees toJames Wilson in the form of commissions for products he sells her. She buys anannuity and a nursing home and home health care policy. Attorney fees for thetrust are $4,200. The business man, who is an insurance agent, will receivebetween $1,000 and $1,500 from the $4,200 collected for the trust. This is hisfee for the fieldwork collecting required information. The attorney nevermeets June, never discusses her tax status, her will (they dont even ask herif she has one), or other financial aspects of her life. The trust shereceives has been formulated from a software program that allows the attorneysstaff to simply input her personal information. It is not specificallydesigned for her needs. Directions come with it telling June how to move herassets into the document. Since June is not likely to properly carry this out,the trust will remain a non-funded or empty document.

The agent also receivedcommissions on the products he sold. Unfortunately, while the productsthemselves were fine, the method in which they were sold left June thinkingthat she was financially protected against a nursing home stay and that shewould be able to remain in her own home, fully protected by coverage. Shenever realized the limitations in her long-term care policy (as evidenced byher belief that she would have unlimited home care benefits). Furthermore, shethought the annuity would allow her to be qualified for Medicaid benefits. HadJames sold her a Partnership long-term care policy, that could actually havebeen accurate, but the policy he placed was not a Partnership policy.Therefore, there is no guarantee that her assets will be protected fromMedicaid spend-down.

The following is fromthe State of California:

California Attachment II

From Harry W.Low, California Insurance Commissioner

December 12, 2001

The purposesof this Notice are to:

1. Inform insurers and production agents regarding the use of a marketing scheme known as a living trust mill, and to address the responsibilities of both insurers and producers in assuring that the described or similar marketing practices are not used in the solicitation and sale of Insurance in California.

2. Address the provisions of the Insurance Information and Privacy Protection Act of the California Insurance Code, as they relate to the use of pretext interviews by insurers, producers, and insurance-support organizations.

LivingTrust Mills

Put simply, aliving trust mill is an unlawful marketing scheme designed to accomplish thesale of annuities that is principally used in the solicitation of seniorcitizens. While the specifics of living trust mills may vary, they all sharethe common attributes of misrepresentation of identity and purpose. Eachmisrepresents the actual business of the sales representative and the truepurpose of the solicitation. The initial approach to clients may be to solicitsenior citizens at seminars, purportedly designed to educate participantsabout the benefits of living trusts and other estate planning devices. Theapproach may be about the benefits of living trusts and other estate planningdevices. The approach may be through mass mailings, telemarketing,door-to-door solicitation, or even while providing entertainment at seniorrelated functions. Regardless of how clients are initially solicited, thesales presentations are basically the same. The representatives misrepresentthemselves as experts in estate planning. They gain the trust and confidenceof the client, and then misuse that trust to discover the extent of theclients assets under the pretext of determining whether the client can benefitfrom a living trust. Trust mills typically use both licensed and unlicensedrepresentatives, and often operate in conjunction with attorneys or attorneyreference services in order to give the operation the appearance oflegitimacy. After the living trust and related estate planning documents havebeen sold, a representative, usually a licensed agent, again misrepresentinghis or her identity and purpose, attempts to sell an annuity to the client aspart of their estate-planning program. Clients characteristically perceive theagent as their legal advisor or estate planner and not as an insurance agent.

In 1997, thePeople of the State of California, represented by the Attorney General and anumber of district and city attorneys, sought civil penalties, restitution, andinjunctive relief against Fremont Life insurance Company and others, includinga corporate licensed life agent[1]and several individual licensees, in an action alleging unfair businesspractices and false advertising under California Business and Professions Codesections 17200 and 17500. The specific allegations of the Complaint were thatthe insurer, the agents and others, operated a living trust mill in which theagents, posing as experts in estate planning, marketed an estate plan to seniorcitizens in the manner described above. It was alleged that the concealedmaterial purpose for an estate planning interview conducted by the agents wasto obtain personal financial information from clients in anticipation of thesale of a Freemont Life Insurance Company annuity, and receipt of thecommissions generated by the sale. Where clients agreed to purchase the estateplan, the agents prepared standardized trust documents, and delivered them tothe purchasers for execution during subsequent appointments. Typically, theagents would solicit the clients for the purchase of the annuity during thedelivery and execution process.

The lawsuitagainst the insurer proceeded to trial in Los Angeles Superior Court in early1999; the production agents having previously stipulated to a final judgmentwhich included civil penalties and restitution. On October 27, 1999, the court filed its Statement of Decision in favor of thePeople and against Fremont Life Insurance Company. In making affirmativefindings with regard to each of the above-recited allegations, the court madethe following significant determinations:

• The insurer was involved in and responsible for the unauthorized practice of law by its agents in marketing the estate plans.
• The insurer was engaged in an unfair, fraudulent and deceptive business practice in the marketing of its annuities where, pursuant to training practices known to the insurer, its agents:
• Misrepresented that they were advisors on matters of estate planning through the use of inter vivos trusts, rather than salespersons who had the ultimate goal of selling annuity policies to customers.
• Misrepresented that the agency was an organization of senior citizens or an organization, which functioned on behalf of senior citizens, rather than an insurance sales organization.
• The insurer was responsible for the acts of its agents, not only under the theory of agency, but that of ratification for accepting the substantial benefits of the unlawful acts of its salespersons.

The courtsStatement of Decision and subsequent judgment provided injunctive relief,restitution to policyholders and civil penalties of approximately $2.5 milliondollars. While an appeal is currently pending regarding the amount of theaward of civil penalties, the appeal is not material to the findings of thecourt addressed herein.

While thislitigation was widely publicized, both within and outside the insuranceindustry, the Insurance Commissioner continues to receive and investigatecomplaints of similar activities, and to take action against those foundresponsible for unlawful practices. These continuing circ*mstances havenecessitated the issuance of this Notice. The Commissioner, along with otherstate and local officials, is determined to stop these fraudulent practices bypursuing all appropriate administrative, civil and criminal enforcementremedies necessary to the task.

PretextInterviews

Theactivities described in this Notice, both with regard to the pending litigationand general discussion, are actionable under Business and Professions Codesections 17200 and 17500. As indicated above, established violations canresult in injunctive relief, restitution and both civil and criminalpenalties. As well, such violations are administratively actionable under theprovisions of the Insurance Information and Privacy Protection Act,[2] and may result in orders to ceaseand desist, subsequent monetary penalties and the suspension or revocation ofcertificates of authority and production agent licenses.

InsuranceCode section 791.03 provides that no insurance institution, agent or insurancesupport-organization[3]shall use or authorize the use of pretext interviews to obtain information inconnection with an insurance transaction. Insurance Code section 790.02(u)defines PretextInterview as an interview whereby a person, inan attempt to obtain information about a natural person, performs one or moreof the following acts: (1) Pretends to be someone he or she is not. (2)Pretends to represent a person he or she is not in fact representing. (3)Misrepresents the true purpose of the interview. (4) Refuses to identifyhimself or herself upon request.

Acts (1)through (3) are inherent in the operation of a trust mill, and insurers andagents found to have used or authorized the use of these practices will be thesubject of appropriate sanctions under the Insurance Information and PrivacyProtection Act.

While neither the Business and Professions CodesUnfair Competition Law or the Insurance Information and Privacy Protection Actare limited in their application to living trust mills, the prevalence of suchschemes in current marketing practices is cause for the Insurance Commissionerto request agent and insurers to conduct a focused identification and review ofeach marketing program in which they are involved, for the purpose of assessingtheir compliance with the above cited statues. Particular attention should begiven to any program for annuity sales in which the insurer or agent states orinfers that they possess particular expertise in the areas of law, finance orfinancial planning. Offending programs should be corrected immediately, andremedial action should be taken. Remediation should include allowingpurchasers that were unlawfully solicited to rescind their contracts.

Thank you foryour consideration of this matter.

End of California Attachment II

Californiais not the only state that has had issues with the way revocable living trustswere marketed and connected to the sale of annuities. Other states have alsogone to court in an attempt to clean up the marketplace of such products andpractices.

Annuities are not theonly insurance item that is sold from pretext interviews. Long-term carepolicies are among the insurance products that will be the ultimate sales goal.In fact, the sale of any insurance product might be integrated into the themeof estate planning.

While many agents docomplete additional schooling so that they are legitimately able to performsome elements of estate planning, the agents and other people that are involvedin trust mills do not typically have the required background to call themselvesexperts. There is concern that they are also performing the unauthorizedpractice of law in the documents that they draft and deliver. The Business andProfessions Code Section 6125 states: No person shall practice law in California unless the person is an active member of the State Bar. Agents may be giving legal advice at any point inthe process from filling out forms to interpreting the legal documents thatthey deliver to the consumers.

The California Insurance Commissioner does have the legal right tosuspend or revoke any license issued in connection with insurance. UnderCalifornia Insurance Code 1668.1 he or she may do so if the agent has:

1. Induced a client directly or indirectly to cosign or make a loan, make an investment, a gift (including a testamentary gift), or provide any future benefit through a right of survivorship to the licensee or any person in the licensees family including a domestic partner, any friend, or any business acquaintance.

2. Induced a client directly or indirectly to make the licensee or any person in his or her family including a domestic partner, friend, or business acquaintance a beneficiary under the terms of any intervivos or testamentary trust or the owner or beneficiary of a life insurance policy or annuity.

3. Induced a client directly or indirectly to make the licensee or any person in his or her family, including a domestic partner, a trustee under the terms of any intervivos or testamentary trust. If the licensee is also an attorney in any state, however, the licensee may be made a trustee under the terms of any intervivos or testamentary trust as long as the licensee has not sold insurance to the trustor of the trust.

4. Received a power of attorney for a client and then sold the client insurance or used the power of attorney to purchase an insurance product on behalf of the client for which the licensee has received a commission.

The commissioner wouldnot revoke or suspend a license if the client is a person related to thelicensee by birth, marriage, or adoption. Nor would the commissioner revoke orsuspend a license if the client were a domestic partner. In those cases, itwould be reasonable for the licensee to handle the insurance purchases.

As previously stated,penalties would apply when agents violate California Insurance Codes. Thereare several codes that apply. CIC 782 says that any person who misrepresentsthe terms of a proposed policy, including the benefits promised or futuredividends, or misrepresents a policy that is being replaced is guilty of amisdemeanor, which is punishable by a fine not exceeding $1,500 or byimprisonment for up to six months.

California Insurance Code789.3 allows additional penalties. Any broker, agent, or other person orentity engaged in the transaction o f insurance (other than an insurer) whoknowingly recommends insurance providing health benefits (1) directly to a Medi-Calbeneficiary who is age 65, (2) unnecessarily replaces a disability policy of aperson age 65 or older, (3) overloads insurance policies on someone 65 or moreyears old, (4) or knowingly recommends someone 65 or older buy insurance thatwill provide benefits in excess of 100 percent of actual medical expenses isliable for an administrative penalty of at least $1,000 for the first penaltyand at least $5,000 for second and subsequent violations. The maximum penaltyis $50,000 per violation.

An insurer could befined $10,000 for the first violation and at least $30,000 for subsequentviolations. Their maximum penalty is no more than $300,000 per violation. TheCalifornia commissioner can also require the rescission ofany contract found to have been offered in violation of the states laws andregulations.

CIC 1738.5 statesproceedings that involve allegations of misconduct perpetrated against a personage 65 or more must be held within 90 days after receipt by the department ofthe notice of defense, unless a continuance of the hearing is granted. Oncethe matter has been set for a hearing, only the administrative law judge maygrant a continuance. The administrative law judge has the option of granting acontinuance due to the death or incapacitating illness of an involved party, arepresentative of an involved party, a witness to an essential fact, or for theparent, child, or member of the household of any of these parties.

A continuance may alsobe granted if a party did not receive the notice of hearing, or for a materialchange in the status of the case involving a change in one of the partiesinvolved. It could be postponed due to a particular pleading or for anexecuted settlement. It could be postponed if stipulated findings of factchange the need for having a hearing. A partial amendment of the pleadings isnot necessarily a good cause for a continuance.

It may be necessary togrant a continuance if one of the parties or their representative (usually anattorney) is not able to make the scheduled date or if a substitution of therepresentative is necessary. Of course, an unavoidable or unforeseeableemergency may also make a continuance necessary.

CIC 10509.9 says anagent or other person or entity (other than an insurer) engaged in the businessof insurance that recommends an inappropriate policy replacement is liable foran administrative penalty of no less than $1,000 for the first violation.Subsequent violations may be penalized no less than $5,000 per violation. Thepenalty may be no greater than $50,000.

An insurer thatinitiates or allows an inappropriate policy replacement may be liable for anadministrative penalty of at least $10,000 dollars for the first offense and atleast $30,000 for subsequent offenses. The insurer may be penalized no morethan $300,000 per offense.

ClientSuitability for Annuities

As every agent surelyknows, annuities are not necessarily suitable for every client. Each person isan individual with individual needs and desires. The NAIC (National Associationof Insurance Commissioners), during their 2003 fall national meeting, adopted amodel regulation designed to help protect senior consumers when the purchase orexchange annuity products.

Senior Americans are themost likely focus of annuity products since they are often converting othermonies to financial vehicles aimed at protecting their principal whileproducing income to live on. In addition, this age group often has the fundsto invest in annuities. Obviously, agents will go to those consumers mostlikely to purchase the product they are selling.

NAIC Senior Protection in AnnuityTransactions Model Act & Regulation

Because there wasconcern that seniors would be taken advantage of, the NAIC looked at offeringguidance. This guidance came forth in the SeniorProtection in Annuity Transactions Model Act & Regulation. Thenew measure, which must be adopted by the individual states, is aimedspecifically at individuals who are age 65 or older. The new regulationprovides standards and procedures for insurers and agents involved with seniorconsumers as follows:

1. The agent, or insurer if no agent is involved, must have reasonable grounds for believing that the annuity is suitable for the senior on the basis of the facts disclosed regarding the seniors financial situation.
2. Prior to the purchase or annuity exchange, there must be reasonable efforts made to obtain information about the seniors financial status, tax status, investment objectives, and other information that could be reasonably considered by the agent or insurer in making the recommendations for purchase.
3. If the senior consumer declines (refuses) to provide the financial and tax information necessary to establish sufficient suitability for the product, then the agent and insurer are relieved of any obligation to determine whether or not the product fits the individuals needs. An insurer or agents recommendation will be considered reasonable under the circ*mstances actually known to the insurer or agent at the time of recommendation.
4. It is the responsibility of the insurance company to have a system in place that is reasonably designed to achieve compliance with the suitability regulation. An insurer may meet this obligation by conducting periodic reviews or by contracting with a third party to do so. If a third party is used, they must maintain the supervisory system providing certification to the insurer that the supervision is occurring.
5. Compliance with the National Association of Securities dealers Conduct Rules regarding suitability will satisfy the requirements for variable annuities. However, this does not limit the insurance commissioners ability to enforce the provisions of the new regulation.

The model regulationdoes exempt insurers and producers from recommendations involvingdirect-response solicitations where no personal information is gathered, aswell as various funded contracts covered under federal law.

How does an agentdetermine if the consumer is a suitable person to purchase or exchange anannuity? Each insurer will specify their criteria, but there are some commonsense approaches as well.

Financial Status iscertainly a necessary component in establishing whether or not a person shouldpurchase or exchange an annuity product. The consumer must be able to meetday-to-day obligations. Determining that ability will require looking at someelements, including:

Income: Obviously there must be the financial means to purchase the annuity,if no exchange is involved. Often, an annuity is purchased from an existingsum of cash, whether that happens to be a repositioning of money in aCertificate of Deposit or a cashed out pension plan. It is possible topurchase an annuity by making systematic deposits over a period of time, butthose under the age of 65 usually do that. The NAIC annuity model act wasspecifically aimed at senior consumers.

LiquidAssets: It is fromalready-acquired assets that senior annuity sales are most often developed. Itwould be foolish to take all the liquid cash a consumer had and tie it up in along-term annuity product. It is important that each person, including seniorAmericans, have cash on hand that is readily available to them.

Long-TermCare Insurance: While noteveryone needs to purchase a long-term care insurance product, part of theagents job is to assess whether or not other needs have been addressed. Thisis a need of senior consumers that must be considered.

The Senior Protection inAnnuity Transactions Model Act & Regulation attempts to set forth minimumstandards and procedures for insurers and agents who make recommendations tothose who are age 65 or more regarding annuity products. The point is toassess consumer needs and financial objectives of senior consumers. This actincludes the purchase of a new product and the replacement of an existingannuity.

The model regulationsays that the insurer and producer must make every effort to obtain relevantinformation from the potential client who is 65 or older to makerecommendations that are appropriate to assist the individual in meeting theirinsurance needs and objectives. The definition of relevant customerinformation includes similar data collection also required by securityregulations like job status, if any, age, income, ability to pay, amount andcomposition of net worth, investment experience, and time horizon, but theinsurance suitability regulation also asks the insurer and producer to assessthe need for tax advantages, the consumers concern for preservation ofprincipal, and the consumers awareness of liquidity limitations and surrendercharges that are in annuities.

If the consumer refusesto supply this information, then the agent and insurer have no duty to makesuitability determinations. Producers will be able to avoid consequences ifthey follow the insurers compliance procedures.

This is not the firsttime that there was an effort to protect senior citizens through legislation.An earlier attempt at defining suitability failed in part because it wasperceived as too board based.[4]The newer version of consumer protection is trying to use a smaller focusemphasizing what has been perceived as annuity sale abuses.

There is no doubt thatthere have been abuses in the sale of annuities. Primarily, say most industryexperts, the abuse has been the lack of disclosed information. While allproduct information is important, primarily the surrender fees and other costshave not been adequately explained at the point of sale, they say.

CIC 10168.7 statesthat any contract that does not provide cash surrender benefits or deathbenefits at least equal to the minimum nonforfeiture amount prior to thecommencement of any annuity payments must include a statement in a prominentplace in the policy that such benefits are not provided.

Any type of financialvehicle must maintain appropriate records so that the investor is able to tractperformance. Agents must also understand the need for record keeping on theclients they have and the types of products they have purchased. In addition,it is important that agents keep records of the information they have gatheredprior to recommending the sale of an annuity product. This protects the agentshould a family member think that proper suitability standards were not metprior to the annuity sale.

End of Chapter Four