Department of Insurance investigation reveals insurer took advantage of seniors with deceptive annuity sales tactics
News: 2015 Press Release
SACRAMENTO, Calif. - Midland National Life Insurance Company has agreed to pay a $1.3 million settlement and reform its business practices, after a market conduct examination by the California Department of Insurance revealed the insurer was taking advantage of seniors in the sale of inappropriate annuities by using deceptive and misleading tactics.
"Midland's illegal tactics provided big commissions for their agents and handsome profits for Midland while seniors lost money," said Insurance Commissioner Dave Jones. "To combat these illegal practices and protect vulnerable seniors, I sponsored AB 689 (Blumenfield) which was signed into law by Governor Brown in 2011. The new law requires document and product suitability reviews for annuity sales and documentation of the review to protect the consumer."
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.
Investigators also found numerous instances in which Midland National agents earned commissions by selling unnecessary replacement annuities to senior citizens. Seniors are more vulnerable because they are trusting and often do not have someone looking out for their best interest. Annuities usually include large surrender payments, if a consumer needs to liquidate the annuity, which is more likely to occur for a senior that might need cash for medical care or long-term care payments.
"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.
Unnecessary replacement of an existing annuity was another practice uncovered by investigators. In another example, an agent replaced an existing higher-interest annuity for an 85-year-old woman with one that left her locked into a lower-earning rate for eight years. Her existing annuity had no surrender charges and guaranteed a 5.5 percent interest. She was sold a Midland National annuity that guaranteed a 4.35 percent interest rate for eight years and three percent in interest thereafter-substantially less than her existing investment. Additionally, the Midland annuity had a surrender charge of 10 percent for five years, grading down to zero after eight years.
- Link to the pleading documents and settlement agreement.
- The $1.3 million Midland National has agreed to pay consists of a $900,000 monetary penalty and $400,000 in attorneys' fees and costs.
- Within five years, Midland National will undergo another market conduct exam to ensure they are complying with the conditions of the settlement.
- Commissioner Jones has taken additional steps to protect consumers from these illegal practices. In 2011 the Governor signed AB689 (Blumenfield) into law, which requires document and product suitability reviews for annuity salesand documentation of the review to protect the consumer.
The California Department of Insurance, established in 1868, is the largest consumer protection agency in California. Insurers collect $310 billion in premiums annually in California. Since 2011 the California Department of Insurance received more than 1,000,000 calls from consumers and helped recover over $469 million in claims and premiums. Please visit the Department of Insurance website at www.insurance.ca.gov. Non-media inquiries should be directed to the Consumer Hotline at 800.927.4357. Telecommunications Devices for the Deaf (TDD), please dial 800.482.4833.