Elder Financial Fraud and Immediate Annuities

gm-bioOne of the problems regarding elder financial fraud is average families have not fully considered all the merits of the array of financial products and how they might work to protect them from elder financial fraud.  However, in today’s day and age, this is surprisingly an extremely short list indeed.   The protection really needs to start at the financial product level and not just be some new advisor practice penalty, fine, new training designation requirement, oversight, etc. usually considered by regulatory groups[i]  for ramifications that only occur after the elder financial fraud is committed.  A recent MetLife Mature Market Institute survey estimates the understated annual elder financial fraud loss at $2.9 billion.

 Elder financial fraud protection need is dire and only projected to become worse as our population ages and a large segment of this growing group becomes subject to diminished mental capacity risk.   For many seniors this time will stretch from, the last moment of perfect cognitive ability to, when cognitive ability becomes so impaired as to call for some kind of institutionalization or third party intervention.  This time usually represents a gradual mental capacity decline, perhaps over decades.  As things stand now, one-third of all enforcement actions initiated by state security regulators involve senior citizens[ii].

Such senior protections are in the natural realm of the insurance industry because the industry has the financial products necessary to stop this problem in its tracks before it can even get started in the first place and therefore neutralizing the need for more third party regulator actions.

In this case, I’m talking about mortality pooled annuity contracts and life insurance policies where all family members annuitants/insureds and their beneficiaries are in the same mortality pool.  A family that mortality pools together keeps their assets together.  Immediate and also reversionary annuity contracts have much more going for them than merely the annual incomes they produce.  Unlike fixed index annuity (FIA) and variable annuity (VA) contracts both with secondary withdrawal guarantees, many life insurance policy designs and investment/savings products of all shapes and sizes, fixed and mortality pooled immediate annuity contracts alongside their reversionary annuity cousins were designed to produce lifetime incomes and too stay the course.  They can’t become dissipated because fixed mortality pooled immediate annuity and reversionary annuity contracts are only valuable to their owners and beneficiaries.  The contracts’ mechanical dynamics protect families under financial duress.

In the  annuity purchase suitability determination process, officers at home offices who make such judgments, permitting annuity transactions, need to consider much higher levels of annuitized wealth as a percentage of overall wealth to be appropriate for older individuals.  Certainly, the total of all living expenses and annual payment obligations needs to be considered along with a quality of life premium all adjusted to grow at some annual fixed rate towards the maximum permitted premiums as a percentage of net worth.  The cap might extend to as much as the age of the annuitant/owner as a percentage of 100.  For an example, a person age 80 could be looking at holding a top percentage of 80% of their assets in mortality pooled annuitized wealth, if this amount is needed to cover the annual expenses, obligations and quality of life needs incorporating annual  cost of living adjustments (COLAs).

The life insurance industry should immediately step up to the plate and embark on a media campaign to encourage all households to mortality pool a percentage of their assets in order to deter elder financial fraud and to protect household incomes and legacy bequests.

The advantage of holding mortality pooled annuitized wealth is; if households burn through their non-annuitized wealth for whatever reason and while they survive then, they have their mortality pooled annuity contracts keeping them off public and extended family support mechanisms, if any.   While elder financial fraud is a good way to burn through non-annuitized wealth it by no means is the only way.  There are all kinds of ways to lose money and many of them have nothing to do with the financial markets.  Just to name a few other ways and depending on your age; people can lose wealth via LTC costs, unreimbursed health care expenses, adverse litigation, divorce, career interruptions, Medicaid estate claims, bankruptcies, large casualty losses, civil asset forfeitures, enforcement of state Filial responsibility laws, financial frauds and business failures.

As a society, the stock and bond markets are the least of our worries.  Because of their ages, seniors can’t recover from dissipation losses because they are out of time.  Younger individuals, facing financial disasters, who purchase mortality pooled deferred income annuity (DIA) contracts obtain a financial basis from which to rebuild.

One of the most powerful protectionist financial products in the history of mankind needs to be severely elevated from its current pop-gun status to rock star status.  Solely limiting immediate annuity discussions to addressing retirement income deficits is an astonishing underutilization.  The life insurance industry needs to acquire the courage to formulate a strategic vision that is bold and clear of purpose regarding all the utilities of immediate annuity and reversionary annuity contracts.   The aftermath of 2008 is not entirely settled.  Certainly seniors, as well as the rest of us, may be in store for more perilous times and no one can withstand further loss.  Unfortunately, I’m afraid there will be more financial blood in the streets until we can bring ourselves to have a broader and comprehensive discussion regarding the proper place for mortality pooled immediate annuity and reversionary annuity contracts.   That’s the idea; “Always Keep Your Hands Up.”

 

[i] “Protecting Grandma From Elder Abuse”, Mellan Oliva, http://www.lifehealthpro.com/2015/04/10/protecting-grandma-from-elder-abuse?t=fixed-indexed April 15, 2015, accessed April 2015

[ii] “Why NASAA is Leading the Charge Against Elder Fraud”, Beatty William, http://www.thinkadvisor.com/2014/11/05/why-nasaa-is-leading-the-charge-against-elder-frau November 5, 2014, accessed April 2015

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