Why You Shouldn’t Sell Annuities from B Rated Carriers
Article Published in 2019
I may sound like a broken record, but boy, the insurance industry deserves its reputation as one that cares more about commissions than what’s best for clients. After this newsletter, you probably will agree.
You also might want to learn about what I call the “Best FIA IMOs Won’t Tell You About.” To learn more about my favorite FIA (high caps, high par rate, flexible premiums, pays a 1% trail commission, etc.), click on the following link:
I read the newsletters/ads put out by all the major IMOs (Insurance Marketing Organizations). Most of the time I just ignore them, but recently a few have gotten my attention with their brazen advertisement of a particular FIA (Fixed Indexed Annuity).
The ad goes something like this…
Illustrates 12% Annual Avg. Returns and Offers Up to 8.25% Total Compensation
Sound great right? We should all be selling this to clients, shouldn’t we? 12% annual returns and 8.25% comp for agents.
What’s the problem?
1) The 12% return is utter nonsense. It’s a backtested number using a newly created Volatility Control Index with an annual asset-based fee to buy up the participation rate.
FYI, the annual S&P 500 cap for their 7-year product is 4% and the par rate for their no cap 100% par product is 35% (not competitive).
2) Most commission-driven FIAs have tricked up designs. There is only so much money to go around when building an FIA. If the company is paying more commissions than what all other carriers are paying, that is a red flag (anyone remember selling super high commission annuity products offered by Conceo (who filed bankruptcy)?).
3) It’s a B Rated carrier. What’s wrong with B Rated carriers?
a) Typical E&O insurance doesn’t cover sales from B Rated carriers. You have to get a special endorsement or separate policy to cover sales of B Rated carriers. It’s crazy how many advisors I’ve talked with who have sold a B Rated carrier product and have no idea that it’s NOT covered by their E&O. What’s worse is that most IMOs who recommend these products don’t tell agents it’s not covered.
b) Many B Rated carriers have issues with their finances (or they’d be A- or better rated).
A.M. Best gives this carrier a B+ rating.
Standard & Poor’s give it a BB rating.
From the web: The negative outlook on this company’s Insurance rating takes into account its counterparty exposure to PHL Variable Insurance, the effectiveness of the company’s management of insurance risks, and potential operational and reputational risks.
It faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor’s inadequate capacity to meet its financial commitments.
Are you kidding me?
Who in their right mind would ever sell a high commission product from a company with this kind of outlook? And what are the chances that before selling this product to clients that agents selling it disclose to clients the above information? ZERO! If they did, no client in their right mind would buy the product.
But this product has been advertised by several major IMOs (without disclosure that it’s a B Rated carrier).
B Rated company products being peddled today:
- Nassau Re (A.M. Best B+ rated)
- Equitable Life & Casualty (A.M. Best B rated)
- Atlantic Coast Life (A.M. Best B++ rated)
- Guggenheim (A.M. Best B++ rated)
- EquiTrust (A.M. Best B++ rated)
- Sentinel Security (A.M. Best B++ rated)
Am I saying that no one should ever buy a product from a B Rated carrier? I’m not flat out saying that, but I am saying I would never sell one and if I did, I’d sell it in a full disclosure manner and make sure I had E&O coverage.
What can be learned from this newsletter?
That most IMOs don’t care about you or your clients. They care about making sales at all costs. In this case, it’s the sales of a product from an insurance company that has questionable financials but big commissions to agents.
Roccy DeFrancesco, JD, CAPP, CMP
Founder, The Wealth Preservation Institute
Co-Founder, The Asset Protection Society