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Documentation: The Difference Between Acquittal and Conviction

By Michael J. Prestwich

One of the unintended consequences of the 2010 Suitability in Annuity Transactions Model Regulation is that complying with its numerous provisions will be more difficult than in times past, and therefore, in the eyes of some attorneys, it is now easier to sue insurance companies and their producers.

These lawyers know that a legal defense is only as good as its evidence, and since annuity producers are notorious for keeping little or no records, annuity fraud litigation can be extremely lucrative. I wonder how many lawyers dreamed of getting their share from the next big case after they read the opening paragraph from the Top Class Actions Newsletter: “More than 3,274 senior citizens who purchased annuities from National Western Life Insurance will share in a $17 million class action lawsuit settlement over allegations the company targeted seniors with hidden penalties and false representations.”

Annuity producers now swim in shark-infested waters. Anti-annuity websites published byattorneys, self-proclaimed consumer advocates, and popular financial periodicals frequently try to dissuade consumers against annuities. Money Magazine recently quoted William Reichenstein, an investment management professor at Baylor University, who described fixed indexed annuities as "very seductive products, marketed very effectively, but they almost always underperform."

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At last year’sIMSA Suitability Summittwo SEC representatives, John Fahey and John Walsh, presented 10 Hot Topics. Several of these directly concern fixed annuity producers and the companies they represent: 1) Suitability, 2) Supervision, 4) Sales to Seniors, 7) Replacements, 9) Disclosure of Guarantees, and 10) Enforcement ofCompany Guidelines. The take home message for annuity producers: Beware. The regulators are watching.

Protect yourself. Archive a copy of everythingyou tell or show to a prospective customer. This includes confidential client interview forms, yellow pad presentations, seminar slides, illustrations, proposals, articles, and comparisons. Make an audio recording with your interaction with your client when you explain interest rate formulas, surrender charges, premium bonuses, costs and benefits of lifetime income riders, and guaranteed policy values. In short, follow company-approved sales practices, keep credible documents to prove it, and keep these documents forever.

Provide ammunition.Complaints usually land in the lap of the insurance company’s legal department, who will generally choose the least expensive and most practical way to settle the complaint. In 2009 I reported on my blog about a producer who suffered a$78,000 commission charge backbecause the client's attorney had compiled a convincing case that the producer had made an unsuitable sale.

This producer complained vehemently to me stating that, “the insurance company threw me under the bus without a fight.” After examining the producer’s lack of sales documentation, however, convinced me that the insurance company believed they could not win this fight so they had little choice but to settle. I believe the insurance company would have fought for this case had the producer had been able to produce a 10-minute audio track of the client stating, “I understand this annuity product has a 10-year surrender charge, and that this surrender charge is 10 percent in the first year … I am purchasing this annuity to provide a foundation of safety and to diversify my assets instead of being heavily invested in real estate and stocks … the agent has explained to me that future interest rates are calculated based on a positive gain in the S&P 500 index, subject to a 6.60 percent cap … I understand that this cap may change each year … The agent has provided me with the guaranteed minimum surrender values … I understand that this account can never lose money unless I surrender it during the surrender charge period … I have other assets that I will use in case of an emergency, and I plan to leave this money alone for a minimum of 10 years.”

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Archive documents electronically. Printing mountains of paper is expensive. File cabinets take lots of storage space, and pages have a way of getting lost from their file folder. File folders often get misplaced. When a file drawer fills up, all the files must be reshuffled so new files can be inserted. These files must be kept in a secure, fire-proof location. Keeping thousands of paper pages is much too expensive and difficult to manage for the average small office annuity producer.

Instead of trying to manage mountains of paper, use a “paperless” file system to securely keep your stored documents off site. You will need a scanner to convert your paper files into an electronic format and software to manage Adobe’s PDF files. Not surprisingly, I have found Adobe’s Acrobat Standard software (about $100) to provide the best results because of its Reduce File Size feature. There are dozens of software programs that will create PDF files, but make sure that you get one that will create the smallest files.

The reason that you want small file sizes is because you will want to send them across the internet. The larger the file size, the longer you will wait for it to transmit. You may also pay more for storage space.

A simple way to archive electronic documents is to create a Gmail account with Google. They will give you 7 GB of storage space for free, which is about 7,000 scanned pages. Simply email the documents to yourself and use the client’s name in the subject of the email. You should be cautious, however, about transmitting documents via email because the email is generally transmitted over an unsecured internet connection. Google also may also mine your emails for statistical purposes.

Another archiving service is Evernote Premium ($5 per month / $45 per year This service allows you to create file folders under each client’s name and to upload 1 GB per month, which equivalent to about 1,000 scanned pages. They have a free service, but you will be limited to about 60 documents per month. Evernote also has the advantage of transmitting its data over a secured internet connection.

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ImagiSOFT has a free Annuity Document Safe designed for annuity producers. It limits the size of each file to 1 MB, but other than that, it allows unlimited document storage space. The Annuity Document Safe also has the advantage of passing client data to its various annuity illustration systems and electronic smart forms. ImagiSOFT also puts a date and time stamp on each file in case you have to prove that the file was archived at a particular time.

In summary, in today’s litigious world, chances are high that in the future some concerned person will ask you to clarify how and why you recommended a particular annuity. When this happens, you will be glad you took the time with your customer to explain to every feature, answer every question, and keep thorough records. These documents can make the difference between acquittal and conviction when your sales practices are questioned.

Michael J. Prestwich sold his first annuity in 1975. After seven years he started ImagiSOFT, Inc. which develops life insurance and annuity illustration, marketing, and compliance software.

© Entire contents copyright 2011 by Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from


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