Where is the REAL Problem with EIAs?

With the sudden onset of several class actions lawsuits recently filed against insurance companies who issue EIAs, (which we now prefer to call FIAs, for Fixed Indexed Annuities), it calls to question why the pursuit against these products is now finding its way into legal channels, rather than through the regulatory agencies who normally handle such concerns. Similar to the thinking used by Mr. Monk when he solves one of the cases he is working on, it helps if you simply ask the question, “who benefits?” In this case that would need to be a three part question, asking who benefits from the action itself, who benefits from the negative publicity about indexed annuities, and who would benefit it the action prevails?

Let’s begin by looking at who benefits from just the simple filing of any of these cases. Already in the new case against Midland National Life, the attorney for the plaintiffs is being quoted and his name publicized in articles that have made it to the press. We see every day how attorneys advertise on TV looking for big personal injury cases to represent. When the potential prize is the deep pockets of an insurance company, it is a lawyer’s dream, and financial windfall, to settle such a big case. Building a reputation as a winning attorney in such cases can increase the size and number of big cases that come to these law firms. Landing a class action suit, that gains national attention and where the awards can reach hundreds of millions of dollars, is the ultimate professional pinnacle for any attorney who practices this type of law. Even if the case ends in an out of court settlement for far less than the original suit, there can still be enough publicity and fees to change the course of the attorney’s career. After years of watching the battle between the securities and the insurance industry over indexed annuities, it is not surprising to see that attorneys now want to cash in on this conflict, and take their piece of the pie.

In spite of this bad publicity, the securities industry is still losing billions of dollars in lost client investment accounts to indexed annuities, which represents hundreds of millions of dollars in lost commissions to brokers and broker dealers every year. After years of very calculated and deliberate attacks in an effort to discredit these products, it has to be a warm reception for the securities industry to see indexed annuities now being suddenly blindsided by a foe which has been attacking them for decades. While it is unlikely this common agenda will make the securities industry best buds with these carnivorous attorney’s, it is clear that they relish in the outside assistance to their cause to either wipe out indexed annuities or gain control over them.

If any of these class actions prevail, it is ironic to really examine who will NOT win. The supposedly thousands of harmed seniors who bought these annuities in the first place will end up being the big losers if all of this goes to trial and the lawyers prevail. This is not a question about ethics, nor really a question about product suitability, as some have indicated. It is, as it always is when large sums are at stake, a question of money.

The criticism has been falsely made that those elderly adults who purchased any of these indexed annuities have had their “assets frozen.” The basis for this claim is because annuity policies have surrender charges, often for more years than the life expectancy of the owner. The assumption that has been falsely made is that this is preventing these annuity owners access to their money. The truth is that these people have access to ALL of their money through a number of contractually protected means beginning in the very first policy year. First, they can make penalty free withdrawals each year of up to 10% with most companies and in most indexed annuity products. In many cases they can access up to 100% of their money free of any surrender charges if they need nursing care for an extended period of time. And, as with ALL annuities, they can convert their contract into a stream of income they can never outlive. So, unless these people are forced, or frightened, into completely canceling their contracts prematurely, there is no better place for an elderly person to put their nest egg, and their money could not be safer than it currently is in their annuity.

Consider what will happen if these attorneys prevail. Do you think for one minute that they are working on this case for free? They may have made their fees contingent, but they are looking for a large pay day when this case is either won, or settled. If the real concern is for liquidity to these seniors, and the attorneys simply succeed in getting the insurance companies to release the original premium dollars with interst to particpants of this lawsuit without surrender penalties, where are the attorney fee going to come from?

Consider the weak arguments that can be made in a class action against indexed annuities and you will find that it will be impossible for any attorney to make a sound argument that any of the annuity owners were materially harmed in the purchase of their annuity. By contract, 100% of their money is guaranteed, they probably have a minimum guaranteed interest return over the life of the contract, and they have all kinds of access available to their money, as I mentioned above. Change of circumstances or buyers remorse by the purchaser is not the substance for a class action lawsuit. Also, if some of the agents were too greedy or aggressive and did not follow approved or ethical sales procedures with their clients; this would indicate an individual case by case concern against those particular agents, not a class action problem against the insurance company. And, if the insurance company product that was sold was approved by the state insurance department and all state required forms and disclosures were used in the sale, how can the insurance companies, or the agents who used the proper paperwork, be held liable for following the approved insurance law.

Insurance companies who sell indexed annuities have shown, by their past actions, that when it is clear that a client bought an indexed annuity under some type of sales misconduct by an agent; in these rare circumstances, they have offered to give this client their money back without penalty. It is unlikely to think that insurance companies would waste money and the bad publicity to legally fight a truly dissatisfied client who believed they were sold their product unsuitably. So, if there are clients of these companies who have valid complaints, they would probably be much more successful getting all their money back directly from the insurance company without the need or cost of an attorney.

IF, on the off chance that this case was won in court, there could be a punitive award made that could result in a small split of that money to each of the annuity owners. But most likely, if there is a settlement it will be for the insurance company to release all premiums plus interest since date of deposit to each party to this class action suit, and they will have to part with a portion of their “refunded” money in order to pay the attorney for helping them get out of their indexed annuity contract early. With typical attorney contingency fees ranging from 25%-50%, how much of a victory will it really be when these seniors get free of the insurance company, only to have a huge chunk of their money stolen away by their supposed knight in shining armor.