Midland National to Pay $1.3 Million Fine to CA DOI

[DHK]

Department of Insurance investigation reveals insurer took advantage of seniors with deceptive annuity sales tactics

A couple of things about this article:

The settlement was reached in an enforcement action based on findings from a market conduct examination done after the department received consumer complaints. The investigation covered an 18-month period and revealed Midland National agents were selling certificates to group annuities that were issued out of state and Midland National did not make its own agents or consumers aware that the annuity products had not been filed with the California Department of Insurance and did not provide important consumer protections. Midland National has agreed to business practice reforms that eliminate this practice, which other life insurance companies are encouraged to follow.

The underlined parts surprise me.

However, these two paragraphs concerns me most:

"Selling a long-term annuity with a 10 or 15 year surrender period to someone of advanced age can have dangerous financial consequence," said Jones. "If they need to liquidate assets to pay for increasing or unexpected health care or long-term care expenses before the surrender period ends, they will likely face large surrender penalties payments. Insurers must play by the rules and operate ethically, disclosing all pertinent information to consumers. This law also gives me the authority to revoke an agent's license, impose fines, and restore money lost to the consumer."

In one example, a 75-year-old consumer paid approximately $91,000 to Midland National for one of its annuity products. The annuity had a 14-year surrender period, which meant the consumer could not fully liquidate the annuity without paying a penalty until she was 89 years old. Two years after buying the annuity, the consumer had to surrender it because she needed money to pay her bills after her husband had a stroke and was placed in a board and care facility. As a result, she ended up paying a surrender penalty of approximately $27,500 to Midland National.

First, we don't know if these are "qualified funds" - such as an IRA rollover.

Second, many annuities offer surrender charge waivers for the annuitant/contract owner... but not for the spouse of the annuitant/contract owner.

Third, the annuity was authorized for sale in California - currently all 14-year surrender periods are available for ages 0-65. There is a Return of Premium available... in the 3rd contract year for the RetireVantage 14. It was only two years after the annuity contract was issued that she felt she needed to surrender it. If only she could've (would've) waited until the 3rd year.

It's possible that Midland made these changes within the past year or so to their product line... but it still gives me pause.

Obviously agents need to ensure that there are other liquid money available and not tie it all up in an annuity - especially if this was a CD to Annuity purchase.

If you're working with seniors in California... be careful.

Granted, this isn't against an AGENT... but against the INSURER itself. It still makes us all aware that the agent needs to ensure that we are making suitable sales recommendations.

 

[scagnt83]

It is not accurate at all to compare the RetireVantage to the rest of Midlands annuity line. It is a totally different product with features that pretty much no other Midland annuities have (or other carriers for that matter).

Most of their products do not have ROP. And I agree that a 14 year product should not be sold to a 75 year old.


BUT, these are GROUP ANNUITIES. If I remember the case correctly it was sold through an association. The big issue (again if this is the case I remember reading about with Midland), was that the association was not based in CA (I think it was AZ or CO). But legally (through what CA called a "loop-hole"), they were allowed sell the policies to members who lived in CA, even though the policy Situs was out of state. This was what CA DOI objected to the most. The fact that the policies were sold to CA residents but not regulated under CA law. And since the company did not "make consumers properly aware" that it was an out of state policy, that was what turned into the big deal.

So at the end of the day it was all about the CA DOI trying to keep their super tight leash on the big bad insurance company. They couldnt make the change they wanted without an getting the state legislature to change the CA insurance code. So they just found a few "victims" which allowed them to claim that people were not properly informed which is why they were "victimized".

But there is a flip side to this case"
As you pointed out DHK, a 14 year surrender is approved in CA for sale to that age range.
However, if I am not mistaken they must be a "qualified investor" or at least meet a minimum standard of wealth, for the 14 year product to be sold now due to the 10/10 regs.
THAT is what they really objected to.
The fact that they were getting around the 10/10 regs via an out of state association contract...


In a way I actually understand their problem with the situation. If I remember correctly a large percentage of those association group annuities were sold to people in CA, and not in the home state the product was registered in.

So I have mixed feeling about this one. CA might be overstepping a little. But at the same time Midland was clearly attempting to side-step CAs 10/10 regs imo.

 

[VolAgent]

In a way I actually understand their problem with the situation. If I remember correctly a large percentage of those association group annuities were sold to people in CA, and not in the home state the product was registered in.

So I have mixed feeling about this one. CA might be overstepping a little. But at the same time Midland was clearly attempting to side-step CAs 10/10 regs imo.

Ignoring whether or not a 14 year surrender is appropriate for a 75 year old, you both mention they are approved up to age 65, so how did he buy one?

Also, based on what you are both saying, I would agree with the DOI. Midland was trying to circumvent the law and misled both agents and consumers.

 

[scagnt83]

Ignoring whether or not a 14 year surrender is appropriate for a 75 year old, you both mention they are approved up to age 65, so how did he buy one?

We are talking about 2 different products. DHK mentioned an individual annuity product that is a new (within last few years) product. The lawsuit is over a group association annuity.

The way the 75 year old bought the 14 year annuity is the policy was not a CA policy. Therefore it was not regulated by the CA insurance code.
It was from a neighboring state (CO or AZ I think), where the association was based out of. So it was regulated by that states insurance code, even though the sale took place in CA.

 

[VolAgent]

We are talking about 2 different products. DHK mentioned an individual annuity product that is a new (within last few years) product. The lawsuit is over a group association annuity.

The way the 75 year old bought the 14 year annuity is the policy was not a CA policy. Therefore it was not regulated by the CA insurance code.
It was from a neighboring state (CO or AZ I think), where the association was based out of. So it was regulated by that states insurance code, even though the sale took place in CA.

Gotcha.

Yeah, I don't feel a ton of sympathy for Midland. They stretched and got their hand slapped for it. Perhaps it followed the letter of the law, but it certainly violated the spirit of the law.

 

[DHK]

Thank you scagnt83. I REALLY wish that these press releases would be much more detailed - at least to agents to help us understand the true facts in the case.

I couldn't guess that this was an association or group annuity based on just this article.

 

[John Galt]

This was (is) an interesting read, carry on gentleman, good stuff.

 

[MNLU]

Ignoring whether or not a 14 year surrender is appropriate for a 75 year old, you both mention they are approved up to age 65, so how did he buy one?

Also, based on what you are both saying, I would agree with the DOI. Midland was trying to circumvent the law and misled both agents and consumers.

I'm not going to comment on the legality of the products or the sales materials provided to the agents to use.

What I find concerning is that Midland National has been settling these class action lawsuits all over the country, making refunds to the policy holders, and then CHARGING BACK THE AGENTS years later for doing what Midland instructed them to do.

I've spoken to agents that have been bankrupted by this and lost their businesses because they spent their commissions running their agencies and lost the trust of the clients they sold these products the way they were told to. Midland is also reporting to other carriers that the agent has an unsatisfied charge back on their account that makes it almost impossible to get a new GA contract.

IMO something is wrong with that picture.

To add insult to injury Midland has been VERY aggressive in their lawsuits and collection practices.

 

[wln417]

DHK: You're always promoting Insurance Pro for life insurance. Do you recommend their annuities marketing as well?

 

[DHK]

The reason I recommend the Insurance Pro Shop so often... is because of the skills they teach in how to do a proper fact-find. While doing the fact-finding and asking great questions, you learn how to give mini-concept presentations so clients can "buy in" to various concepts.

Everything else is about marketing to seeing people who are your ideal prospect that you have the best chance of selling.

For me personally, if I were to enter the Retirement Planning market... I would use the skills taught from IPS, use the Torrid Technologies RetirementView software (the IPS recommends this too), be an RIA/IAR, and diversify the portfolio into FIAs. I'd probably use IPS newsletters as well as their booklets/seminars.