Minnesota AG Swanson Takes on the "Big Boys"

I really wish my industry would do a better job of policing ourselves, in that vein this is a sorrowful post to write. Lori Swanson, the Attorney General of the State of Minnesota, has begun to make a name for herself in the insurance industry. Within a week of her inauguration she filed suit against Allianz Life and last week against American Equity Life. In the interest of full disclosure, I will be biased for Ms. Swanson, as I have never sold any of what are characterized as "two tiered" annuities, just for the reasons she sued the carriers involved.

A two tiered annuity is annuity that requires a payment stream to get at your savings. Annuities should not be considered investments in the same way as stocks or bonds are, but should more properly be considered "savings". They are savings because of the expectations of consistent growth, access and safety. Even what are called "Equity Indexed(EIA)" or "Fixed Indexed(FIA)" annuities are not an investment in the stock market or any other market. There is no risk of loss in a fixed annuity product, which is what makes them ideal for someone saving for retirement.

The concern, and in my opinion rightly so, is that the expectations listed above are not all met and the agent did not do a good job of ensuring that the annuity was suitable for the senior involved. There are often many incentives and marketing ploys used to get the attention of seniors. One that both Allianz and American Equity did is a large "upfront" bonus, some as high as 15% immediately added to your principal. Those bonuses sound great, but what the large print giveth the small print often taketh. The catch is you can't get at those "upfront" bonuses in one lump sum, EVER, you must annuitize; that is take a payment stream.

Buyer beware is a solid mantra, but when a company or its agents design a product that can so easily mislead, they are not, in my opinion, meeting their fiduciary responsibility.

What will happen from all this legal wrangling, you may ask? Most likely the State of Minnesota will either win a judgment, as the facts of the case seem correct, or the companies will settle. This should then continue the trend of more consumer friendly "Equity or Fixed Indexed Annuity" designs.

I say continue the trend, because in 2005 the National Association of Securities Dealers(NASD) issued Members Notice 05-50, which has had the effect of forcing the insurance companies to design more consumer friendly annuities, so that they could be marketed by Registered Securities Representatives. The Securities Dealers are very wary of running afoul of the spirit of the NASD's notices, even though the EIA' or FIA's are not controlled by the NASD, the dealers are. The NASD takes fiduciary responsibility very seriously and no Securities Rep or Dealer wants to have his authority to sell securities removed. Which is good for my readers and all those interested in "getting it right."

The information in this post should serve as a guide for discussion with your insurance professional.