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Documentation Key as Annuity Decisions Intensify

The wrong decision on an annuity exchange or surrender could mean disaster for your client--and potential liability for you.

Judith A. Hasenauer and William E. Hasenauer, 08/08/2013

Co-authored by William E. Hasenauer, JD

The last three of our articles dealt directly with Section 1035 Exchanges. We would like to finish off this series with some thoughts on what we see as current issues faced by advisors that may or may not result in an exchange.

By way of review, exchanges can be either internal or external. With an internal exchange, one life or annuity product is exchanged for another qualifying product issued by the same life insurance company. An external exchange involves two unaffiliated life insurance companies.

In recent times, the landscape involving life and annuity issuers, as well as the products they issue, has changed dramatically. Some of the insurers who were prominent players in the annuity market have significantly and materially changed their operations. They have undertaken various strategies to reduce expenses and potential exposure to mortality and expense risks. Some of these strategies include: ceasing to sell new products, reducing the benefits for products they do offer, significantly reducing staffing, and making offers to existing customers to buy them out of their annuities.

All of this follows a significant economic downturn with continued uncertainty. Many owners of annuities are being offered lump sums for their annuities at a time when they are reaching potential retirement. You, the advisor to many such annuity owners, can anticipate that your clients will be seeking your advice.

This is a scenario for trouble. A wrong decision now could be a disaster for your client. It could also mean potential liability for you.

You have heard us preach about documentation, and if ever there was a situation that required good documentation, this is it. There seems to be emerging some evidence that shows when consumers are fully informed, complaints to regulators go down. That comes as no surprise to us. Also, if you should be so unfortunate as to have to defend yourself in a state insurance department complaint, litigation, or a FINRA arbitration, how well you have documented your recommendations may well determine the outcome.

First, if you are recommending a change in the current annuity holdings through an exchange, buyout, or surrender, we strongly urge that you prepare and deliver to the client comparison information showing, on a hypothetical basis, how the various choices compare with one another. Present your recommendation in writing to your client. First, your client will appreciate your professionalism, but more importantly, it preserves the record. Your client can take the information away for future study or reference, and it eliminates the issue of selective memory. Present the good, the bad, and the ugly for each scenario. We are amazed at how sophisticated the general population has become on annuities, but the current environment presents difficult choices that require professional review and input. Don't add to the confusion. Your job is to sort through the options available to your client and provide the client with a plain-English recommendation.

Judith A. Hasenauer, JD, CLU, is an attorney with the law firm of Blazzard & Hasenauer, P.C. She devotes her practice exclusively to the financial services industry, providing consulting on the development and regulatory clearance of products, compliance issues, distribution issues and related matters, such as advisory activities and industry initiatives.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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