Class Action Could Mean Trouble for Insurers

Insurance companies often make misleading claims to teachers and the elderly when pitching expensive insurance products. Often these two groups fall victims to these deceptive sales gimmicks.

In a recent development, a certified Class Action against insurer ING Group could be a game changer. This is not the first time ING has had legal difficulties with its annuity products regarding teachers and the elderly.

In a recent lawsuit, an 83-year-old plaintiff claimed much of the information in the brochure concerning his Equity Indexed Annuity was false and misleading. What makes this case unique is its comments about the breach of fiduciary duty. 

It’s no surprise that insurance companies are not considered fiduciaries in their relationships with their clients. It would be hard to keep a straight face and declare that the majority of these companies look out for their customers’ best interests. This belief might undergo a transformative change.

This lawsuit asserts that insurers are claiming to be fiduciaries in their marketing materials.Their products often tell an entirely different tale. If this case is ruled in the plaintiff’s favor, it could cause shockwaves to reverberate throughout the world of high-fee commissioned insurance products.

The plaintiff alleges that the ”Defendant promises investors continued commitment, thanking them for ongoing trust and confidence as their preferred financial services provider.” The court or a jury will decide if there was a fiduciary relationship, according to Strategic Marketing Partners.

If this case goes against ING, they will no longer get to have their proverbial cake and eat it too. In other words, they can’t claim to have a relationship of trust with a customer and then proceed to rake them over the coals.

This could open up a whole can of worms and become a precedent for future cases involving high-cost annuities often sold to teachers and our nation’s vulnerable elderly population.

This case involves the sale of an Equity-Indexed Annuity. These products are often sold to teachers and others with very misleading promises made by unscrupulous insurance representatives. The reason these products are so prevalent in many 403(b) plans is they are  “sold,” and not bought by choice.

This product is very easy to sell because it supposedly offers “stock market returns” with no risk of losing principal. It is clear why these products would be popular with teachers and pay very high commissions to agents.

Like anything else too good to be true, this product does not disappoint. The details conveniently left out of this version of investing “Nirvana” are the following:

  1. FINRA and the State of Florida (with its huge elderly population) have put out consumer warnings about the sale of these products.
  2. The returns of the index are calculated without including dividends! This means missing out on about 50% of historic market performance.
  3. Complicated derivatives are used for the stock portion, while the remaining principal is invested in bonds.
  4. In today’s low interest-rate environment, more of the principal must be invested in the bond component, leaving a lower portion for complicated derivative stock exposure.
  5. Principal is used to pay high commissions and cover the product expenses. This leaves even less money to actually garner the projected overstated returns.
  6. There are significant surrender fees in order to get out of this product.
  7. Many of the agents who sell these products do not understand them!

The bottom line is an Equity-Indexed Annuity will most likely match the returns of a bank C.D., after all of the above factors are considered. This is an unacceptable return due to their risk, cost, and lack of liquidity.

This is a very complicated and expensive product. In its present form, E.I.A.’s have no business being a part of a teacher’s 403(b) plan or in an elderly investor’s portfolio.

What’s most interesting about this Class Action is not only will it expose the deceptions inherent in this mostly unsuitable product, but something much more important. It just might call the insurance companies’ bluff.

They cannot continue to market products like these and also promise their customers “commitment and trust.”  Equity-Indexed Annuities and fiduciary responsibilities are about as compatible as Michigan and Ohio State college football fans. They don’t mix well and there are lots of conflicts.

We will have to wait and see regarding the court’s decision. If the verdict goes against the insurers and they are deemed to have fiduciary responsibilities, all bets are off.

ING finally may find out that saying what you mean, and meaning what you say, are more than just words in a brochure.

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