Finally, a Judge with a Brain regarding FIAs

In Hawaii, there arose a ray of hope for the intelligence of our judicial system when a judge there refused to certify a class action suit against Midland National Life Insurance regarding the sale of its annuity products. Unfortunately, in St. Louis, such signs of intelligent judicial life were not present when a judge there upheld the certification of a class action suit against Allianz Life Insurance Company of North America. The irony of the Allianz suit is that the focus of the complaint is about the bonus that is part of that product. Maybe if Allianz just took the bonus back, it would make them all happy and they would just go away.

Of course the real issues here are cleverly disguised behind rhetorical claims of improper sales practices, and confused annuity purchasers. And the motivations that once could be easily identified as a financial jealously by the securities industry over the popularity of FIAs, is now becoming a political issue and another way for money hungry attorneys to try to enrich themselves at the expense of big insurance companies, their customers, and the American public.

The information that seems to be missing in all of these accusations is that every single one of these annuities that were sold by these two companies, as well as those sold by every other company not currently part of any action, are all legal products, sold in a legal manner, by licensed agents, using approved sales materials, forms, and disclosures. Midland and Allianz submitted their products, the sales literature, and all forms to each state insurance department for review and approval before any agent could offer these annuities for sale. And in EACH and EVERY case, the state insurance departments approved the final version of the product sold that is now being questioned. And in each case, the carrier makes sure that any agent who submits an application on behalf of a client is properly licensed in that state to sell insurance products, and that all required paperwork has been properly completed with all client signatures on all forms, including a fully detailed disclosure of how every feature of the product works.

When an insurance carrier follows every single legal requirement precisely to get a product approved for sale, appointing agents, and processing applications, then how can they be found guilty of doing anything wrong? If any group of consumers, or government officials believe there is a problem with any of the product designs or forms used, since they were ALL approved by individual state insurance departments, then the only beef I see they can have is with the state insurance departments. But since there are statues regarding limitations of a suit of a government entity, and it would require a separate suit in each state, there is not enough money in it for the attorneys to pursue such a course. So, they have tried to join the tide of negative propaganda begun by the securities industry of confusing the facts. Then they have been seeking out judges ignorant of the insurance industry and its regulatory structure, to attempt to certify these class actions, hoping that even a settlement will mean millions of dollars for their trouble. Fortunately, in Hawaii, they ran into a judge with some common sense, even if he is not familiar with the specifics of insurance regulation.

The victims in the pursuit of these class action cases are the annuity owners themselves. Not because they bought a product that is defective, or that they were not fully informed of the details of their purchase, but because no matter the outcome they will lose.

Fixed and fixed indexed annuities are one of the most appropriate financial products available for seniors with limited assets and income to place their valuable nest eggs because of their safety and guarantees. The securities market cannot offer the safety and security of principal, and banks cannot offer the long term level of interest that these important products can. And nothing offers the income guarantees that an annuity offers.

Those 400,000 people that are included in the group that are supposedly being represented in the action against Allianz, are not in any financial danger if they left their money alone and retained the annuity product they bought. There is no impending concern that if something is not done soon, they will lose money. In fact, the opposite is true. If they leave their money alone, the product will perform as intended and they will receive the maximum benefits offered in their contract. NONE of them will suffer a surrender charge or penalty, UNLESS they choose to break the contract and withdraw their money early.

If this suit, or at least the publicity of the suit, causes just one person to unnecessarily cancel their contract, withdraw their money, and incur the surrender charge, then that realized cost is not the result of the product, the insurance company, or the sales agent. That loss to the annuity owner is the direct responsibility of the irresponsibility of the attorneys who are pursuing this case. And the way fear and panic can spread through the masses when fueled by the false validation of publicity, it is likely that hundreds, if not thousands of people will unfortunately suffer huge financial losses for no reason, other than they were lead astray by some money hungry lawyer who misrepresented his real intentions.

The worst case scenario is if any of these cases were to prevail, to any degree. The typical take for a law firm pursuing class actions is from 35-50% of the award. That means that for those annuity owner participants who allow the attorneys to represent them in this case, in their hopes of getting out of their contract early and getting their money back without paying the surrender charges, will pay at least double in attorney’s fees from what they would have paid in surrender fees if they had just surrendered their contracts directly to the insurance company. Considering that few, if any of these 400,000 annuity owners, needed to get at all of their money right away; even if for some emergency, they needed more out of their annuity than was allowed without penalty, paying the penalty only on the excess and leaving the rest in the contract, would be the least costly of all emergency options.

Hopefully, as those class action suits that have been certified progress, they will find their way in front of judges who have the mental capacity of the Hawaii judge, and see that there is no class action possible when every product was legally sold under the regulatory authority of the insurance department of each state. If there is individual concern that some agents have used illegal or unethical methods in their sales, I am all for cleaning house of the bad agents. But as the judge in Hawaii so brilliantly concluded, that is an individual case by case consideration, and not a class action.