Ethical Considerations in Annuity Sales to Seniors

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Ethical Considerations in
Annuity Sales to Seniors

National American University

TABLE OF CONTENTS

A. Abstract
B. Introduction - Thesis
C. Definitions
i. Annuities
ii. Fiduciary responsibility
D. The specialty of the senior market
E. The evolution of ethical issues surrounding sales to seniors F. The Government’s Involvement in the Problem
G. In general, when is selling these products to seniors inappropriate? H. In general, when is selling these products to seniors appropriate? I. Using annuities correctly and ethically
J. Conclusion

Abstract
This paper brings to light the ongoing problem of ethical consideration when a licensed agent is selling a life annuity to a senior. The problem of ethical decision making, especially in regard to sales commissions made, is not a new one. A sales person’s greed and desire to meet production or income goals can often override better judgment and allow an advisor to push a client to buy a product that is completely unsuitable for them. On the other hand, there are times when the demographic information may suggest the product is not suitable, but the objective of the customer is such that the product is the best fit. In this paper, we will examine both sides of this dilemma, revealing the opposing views and the laws put in place to guide both the advisor and the consumer.

Introduction
The career of a financial professional can be incredibly rewarding. Helping friends, family and clients determine the best way to invest their life savings to yield the maximum return while at the same time planning for future goals and dreams, is extremely satisfying. As with anything in life, however, where there are positives, there will also be negatives. Part of what makes the role of financial advisor challenging, is the aspect of commissionable sales and appropriate business ethics. In many cases, the financial professional only makes money when a product is sold. That can present quite a quandary for the professional that is concerned about making the best decisions for the customer while also providing an income for him or herself. One area that has received widespread attention is that of sales of annuity products to the senior market. While it is important that our aging community is guided appropriately in the world of financial and life insurance products, the insurance commissioner is making certain advisors can’t take advantage of the older generation. Definitions

The senior market is defined as anyone 65 and older. In order to understand the challenge presented in this specific environment, we must first define the elements involved. According to Wikipedia, an annuity is a contract created when an insured party, usually an individual, pays a life insurance company a single premium that will later be distributed back to the insured party over time. Annuity contracts traditionally provide a guaranteed distribution of income over time, until the death of the person or persons named in the contract or until a final date, whichever comes first (Wikipedia. Retrieved July 22, 2012). The majority of annuity clients use this vehicle to accumulate funds and returns without having to pay capital gains taxes. Typically, later on in their lives, they take lump-sum withdrawals rather than using the guaranteed-income-for-life feature. There are two periods defined for this financial tool: the accumulation period (when payments are paid into the account) and the annuitization period (when the insurance company pays out). There are IRS restrictions regarding how money can be withdrawn from an annuity. Distributions may be taxable and/or penalties may be imposed. Commissions on the sale of an annuity are not generally paid by the client. Typically the insurance company will pay commissions to the financial advisor. In some cases, a commission of up to 12% of the money invested is paid out to the agent. As a point of...
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