Legally, an Annuity could not be More Clear

I am still puzzled by the recent filings of class actions suits against indexed annuity issuers, with claims that the policies were sold to seniors illegally, unsuitably, or unethically. It is important to remember that an annuity, as an insurance product, is a contract between an insurance company and the annuity owner who purchases the policy. To my knowledge, there has never been an insurance company who has breeched their contractual obligations under any indexed annuity contract which has been issued. To really understand this point, let’s review what it takes for an annuity product to be brought to market.

Before any annuity can be offered for sale, first the insurance carrier has to design the product in a way that it believes will have a market appeal, as well as allow the company to make a profit selling this product. The insurance company has to prepare and submit the entire annuity contract, all marketing materials, and all forms and paperwork exactly as they will be used in the presentation and sale of this product, to each state insurance department where it plans to offer the annuity for sale. It is then the task of the state insurance department to review the material, make sure that the product and the materials meet their state insurance laws, return the documents back to the insurance carrier if they require any necessary changes or revisions, and finally, approve the new annuity for sale in its state. If an insurance company wants to sell this new product in every state, it must make 50 different such filings. With each state autonomously controlling their own insurance laws, the insurance company may have to make different changes in each state in order to meet their unique requirements.

Once a product is approved for sale to the public, it is then incumbent upon the insurance carrier, as part of the underwriting process to make sure all required forms and paperwork that were approved by that state insurance department, are properly completed and signed by the purchaser before the policy is issued. If the client willfully makes application to the annuity carrier for the purchase of this product, provides the premium dollars with which to purchase the product, and signs the contractually binding forms with which to enter into this contract, they still have time to get out of the deal, no questions asked. Each state offers a “free look” period where the client can get the actual policy in hand, which is their contract, and do any review of it they choose, or have it reviewed by anyone they choose, and then if they are unsatisfied for ANY reason, they can refuse to accept the policy, return it to the company within the allotted time, and the company is legally and contractually obligated to return all of their money as if the contract never existed.

After the “free look” period has passed, however, the annuity owner is now bound by the terms of the contract which they freely and willfully entered into, and the provisions of which they were provided in complete detail at both the time of application, through state mandated forms, as well as in the delivery of the contract document itself. At this point, the only contractual requirement of the annuity owner, in order to get the full benefits under the contract, is to leave their money on deposit according to the agreement. The insurance company, on the other hand, is now on the hook for guaranteeing the client’s money, tracking and crediting interest, processing statements, providing withdrawals as allowed in the contract, keeping track of the account values, and offering any other policy benefits.

Still, as detailed in the agreement, the annuity owner can fully or partially cancel the contract at any time, with the provision of surrender, which carries with it a early termination penalty called a surrender charge, which was also approved by the state insurance department, disclosed to the client at time of application, and again included in the contract documents. These surrender charges are never assessed unless or until the annuity owner intentially decides to make a withdrawal in excess of the allowed annual withdrawal amount, or if they excercise their contractural right to legally break their contract completely, and get their money back.

So the question is where in the world is there a problem with the performance of the insurance company in this whole process? Since this part of an annuity sale is so carefully controlled and supervised, the only place that anyone has been able to really sink in their teeth and condemn indexed annuities is in the sales process itself, and that focus has been almost entirely on the subject of suitability. But, if suitability is the real question, then either that would be only a case by case consideration, or else, the state insurance departments who approved the sale of a particular product for defined age groups would be the one who would be ultimately liable if it were determined that any specific annuity product were unsuitable for an entire class of people.