Variable Annuity Sold to an 85 Year Old Nursing Home Woman

[BiggitySwat]

Just curious. I have recently encountered a case where an 85 year old woman in a nursing home, with investable assets of around $500K, was sold a mix of fixed and variable annuities. The VA has a 7 year surrender charge and has already lost substantial cash values since the subprime collapse.

The woman's daughter has power of attorney and is the one who signed for her mother to buy these products. The whole idea of this racket came from a Series 6 + 63 licensed captive insurance salesman with a large U.S. insurance company.

I want your opinion here - am I the only one who thinks that this was totally unsuitable? The woman in the nursing home had the needs of capital preservation, current income (to help pay nursing home costs), and ease of transfer to beneficiaries (she already has a trust though).

When I tried voicing my opinion, the woman's daughter and the salesman got upset at me because they are close friends, though I am trying to look out for the mom here - let's just say that I am a fiduciary for this woman and have to look out for her wishes.

What happened to "suitability," where's FINRA and the SEC knocking down doors to 7 year surrender VAs sold to 85 year old women in nursing homes?

 

[Mr. Bill]

You are correct!

The only time I've seen where this might make sense is if the person is terminal, set the policy to very agressive, and hope for a big swing up in the market. If it doesn't work, the principal pays to bene. Doesn't sound like this is the case here.

 

[tkirk97]

IF it was sold as for the death benefit there is no problem with what has been done.

 

[insuranceexec]

I would first check to see if the Fixed annuities have a LTC waiver.

I think I have an idea of the insurance company you are referring too; as this is there practice here as well. While it may not be suitable; the daughter/POA did sign off on it, so I think you are fighting a losing battle here.

While I applaud your efforts for trying to make sure the woman understands what she has done. Pick up and move on.

You could always contact the local ______ office and talk to the manager. But what really surprises me is that the OSJ signed off on the deal; there is probably more to the story that you know. I hope this helps...........

 

[arnguy]

What is an OSJ? IMO it was totally unsuitable.

 

[Winter_123]

The other thing that comes into play here is that there seems to be information that the investments are held in a trust. You have to understand the nature and structure of the trust. In other words, "suitability" has to be determined by understanding the trust versus just what is right for the elderly client who may have given over some of her interests to the trust. Needs to be better understood anyway.

 

[insuranceexec]

What is an OSJ? IMO it was totally unsuitable.

A series 24 or a securities manager. See the link below for more details.

Be an OSJ | Financial Planning | Find Articles at BNET
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The other thing that comes into play here is that there seems to be information that the investments are held in a trust. You have to understand the nature and structure of the trust. In other words, "suitability" has to be determined by understanding the trust versus just what is right for the elderly client who may have given over some of her interests to the trust. Needs to be better understood anyway.

Very good point.

 

[NPCOACH]

A lot more info is needed to pass judgement.

How much of the $500,000 of investable assets were put into annuities? $35,000? $200,000? All of it?...

How much of that was variable and how much of that was fixed? 50/50? 80/20?...

What other assets does she own? Real estate? A business?...

And what are they worth? $500,000 on a $3,000,000 estate might not be a big deal. On a $550,000 estate, it is a big deal.

What is her income? Does she have a pension? Social Security? An immediate annuity? ...A decent income might make the point moot.

Did the annuities have bonuses that pay out at death?

What is the old lady's health like? I know she is in a nursing home, but is she in life threateningly bad health or is it a broken hip with a good prognosis? Both can land you in a nursing home.

How many kids does she have?

Who is the beneficiary of the estate?

If this daughter is an only child and inheriting everything in a few months, it might not be that big of deal. If mom is leaving it to charity and daughter gets nothing except some commission kickback - this might be criminal activity.

OM Financial had an annuity that paid a 4% bonus and was fully vested in the death benefit from day one. An agent I know wrote one for 160,000 on a guy in a hospital in srious condition (the mentally lucid and with the support of his family). He died 10 days later and the 4% bonus yielded an extra $6,000.

Lastly , you wrote "let's just say that I am a fiduciary for this woman..." If her daughter is the power of attorney and she has a broker - what is your fiduciary capacity?

On the surface the situation might be troubling but there are dozens of possible scenarios that might make everything okay.

 

[BiggitySwat]

Here's some information for discussion:

A lot more info is needed to pass judgement.

How much of the $500,000 of investable assets were put into annuities? $35,000? $200,000? All of it?...

$400K of the 500K are into annuities (the remainder being in common stock). 100K of the 400K is variable, 300K is in 5-7 year fixed rate making 3~% annually.

How much of that was variable and how much of that was fixed? 50/50? 80/20?...

See above.

What other assets does she own? Real estate? A business?...

She has no other assets - no real estate, no home, no business. This is her nest egg and assets in totality.

And what are they worth? $500,000 on a $3,000,000 estate might not be a big deal. On a $550,000 estate, it is a big deal.

The estate is only worth $550K - this money IS the estate.

What is her income? Does she have a pension? Social Security? An immediate annuity? ...A decent income might make the point moot.

She has income from pension and Social Security, but no where near enough to cover the nursing home expenses, which are more than 5K a month. Her income from these previously mentioned sources amount to around 2K a month. The remainder of the expenses are being paid for currently by liquidating her positions in this common stock.

Did the annuities have bonuses that pay out at death?

No, just the death benefit or accumulation value, whichever is higher.

What is the old lady's health like? I know she is in a nursing home, but is she in life threateningly bad health or is it a broken hip with a good prognosis? Both can land you in a nursing home.

The client's health is excellent, the only reason she's in a home is because she has trouble taking care of herself due to a physical fall which fractured her pelvis. Her mental state and health otherwise are very good - I foresee her living for quite a time longer.

How many kids does she have?

She has three kids, two of which are in the will and trust.

Who is the beneficiary of the estate?

The benes of the estate, as outlined in the trust, are the two children referenced above.

If this daughter is an only child and inheriting everything in a few months, it might not be that big of deal. If mom is leaving it to charity and daughter gets nothing except some commission kickback - this might be criminal activity.

Mom is not leaving it to charity - all of it are being split between these two children in the will and trust. I do know one of the two children owed a financial favor to the insurance salesman in question, which caused her to apply pressure to the other beneficiary to agree to this transaction. This was not looking out for the best interest of the client IMHO, as I recommended the other beneficiary to "shop around" and get second opinions from other financial planners before signing. No "shopping" was ever done.

OM Financial had an annuity that paid a 4% bonus and was fully vested in the death benefit from day one. An agent I know wrote one for 160,000 on a guy in a hospital in srious condition (the mentally lucid and with the support of his family). He died 10 days later and the 4% bonus yielded an extra $6,000.

I am sure that worked for him, but am not seeing how that would make sense in this situation because the client is in good health, and the client + beneficiary's goals were for capital preservation and current income - don't see how fixed and variable annuities with 5-7 year surrenders would be superior to other options (investment grade bonds, muni bonds, REITs, oil trusts, etc).

Lastly , you wrote "let's just say that I am a fiduciary for this woman..." If her daughter is the power of attorney and she has a broker - what is your fiduciary capacity?

My fiduciary capacity was given to me by one of the two beneficiaries and POAs, as outlined in the will and trust; I came into this transaction during its unfolding. Let's just say I am a direct relative of the client and her family, minus the one beneficiary who is close friends with the salesman, and was brought in for a second opinion.

On the surface the situation might be troubling but there are dozens of possible scenarios that might make everything okay.

You're right, and hopefully the added info I provided will be able to provide for a more accurate discussion. There's little I can do now, I bring up this thread to see how it got passed the insurance company's securities compliance officer when IMHO this would throw up red flags with both my CCO and FINRA if I were the one writing the business.

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The other thing that comes into play here is that there seems to be information that the investments are held in a trust. You have to understand the nature and structure of the trust. In other words, "suitability" has to be determined by understanding the trust versus just what is right for the elderly client who may have given over some of her interests to the trust. Needs to be better understood anyway.

You're right; let me explain. The trust outlines how the remaining assets (the 500K) will be distributed to the heirs and beneficiaries, while excluding some (for personal reasons I don't want to discuss here). There are no bells or whistles to the document; it clearly outlines the responsibilities for the executor of the estate, the beneficiaries, etc. It was designed solely to make asset transfer upon death much smoother and without concerns for the lengthy processes of probate.

As stated above, the estate IS this money - which now is mostly into variable and traditional fixed annuities. I cannot see how a VA with 3%~ fixed annuities was a great idea when I know that the client's goal was current income and current cash flow. I'm not a CPA, but I know that withdrawing out of annuities annually is taxed LIFO, which means it is fully taxable and may affect social security taxation, versus a tax-free mutual fund (for example) that could provide monthly cash flow without generating a 1099.

I just wrote an annuity (FIA) with ING, and in big bold letters on the app said: "Understand that, by signing this agreement, I acknowledge that an annuity is a long term savings vehicle and that I should be prepared to accept limited liquidity for at least ten years...."

 

[NPCOACH]

The added info is of great help. To me, this barely passes the smell test. Now she can probably withdraw 10% a year from the annuities - which would be $40,000+ per year. That along with her $24,000 a year from the pension and social security would appear to cover her expenses.

Keep in mind with annuity withdrawals, only the interest portion withdrawn is taxable. If she is earning 3% and withdrawing 10% - very little would actually be taxable.

She should be able to make withdrawals like this for at least another 10 years.

Not the way I would have done things - but not totally disastrous. The $100,000 in common stock is a bigger concern to me.

As far as how it passed suitabilty guidelines - my guess is the suitability form was answered differently then how you described it. Otherwise with most companies (OM included) this would raise major red flags. I doubt they sent in a suitability form that said 80% of her money is in annuities and 20% is in stocks and that she has monthly living expenses are $5,000 a month. That would not pass muster.

If mom is of sound mind and mentally competent - she could unwind the deal. If she went to the insurer and said I don't think this investment is suitable for my situation because of reasons a, b & c... The insurance company would cancel the deal immediately. I have seen it happen.

Obviously this course of action would get sticky and mom would have to be on board. Usually the clients don't have the stomach for that because of the family strife that would follow. If you are really a fiduciary in any official capacity - you could write the companies and ask how it was reviewed for suitability. If the suitability form contained false information (in my opinion likely based on the facts as you have presented them) the insurance company would rescind the contract. At that level it wouldn't be about mom and suitability - it would be about agent misrepresentation. No insurer will sit still for that.

There are several avenues for recourse if mom wants to pursue it. Unfortunately -she probably won't.

Good luck and keep us informed as to how this unfolds.