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If you’re a member of a professional association or labor union, can you count on its leadership to act in your best interests?
Unfortunately, you can’t. A case in point is a recently concluded lawsuit brought against the National Education Association, a labor union representing more than three million public school employees, by its members.
Here, the NEA marketed a variable annuity it called the “NEA Valuebuilder Plan” to its members. It told its members that the Valuebuilder Plan was “the only annuity nationally endorsed by the NEA.” But, the NEA never fully disclosed that the fees for these plans were as much as ten times as high as those charged for comparable contracts. The NEA also received a portion of these fees as commissions from the annuity providers. (Valuebuilder Plans continue to be marketed to NEA members, but I don’t know if the current versions have the same fee structure as the ones that were the subject of recent litigation.)
In their lawsuit, NEA members alleged that their union intentionally misled them into buying unattractive annuities by preying upon their trust. They sued under terms of the Employee Retirement Income Security Act (ERISA).
Unfortunately, the court disagreed. It ruled that ERISA didn’t apply to the variable annuities and that the members couldn’t sue under its provisions. The members still have the option of bringing a lawsuit based on other legal theories, but in the meantime, the legal bills continue to mount.
This incident also brings to mind an even more fundamental principle when it comes to purchasing insurance or annuities: the solvency of the carrier. (I’m not implying that there’s any question of the solvency of the insurance carriers the NEA used but simply trying to make a larger point.) Since insurance carriers are regulated by the states, not by the federal government, each state applies its own law to compensate policyholders if an insurer becomes insolvent. Typical state limits protect life insurance and individual annuity cash values up to $100,000, and death benefits up to $300,000. Benefits are capped in most states at $300,000 for all policies.
In today’s uncertain economic environment, you can’t take the solvency of a company issuing your life insurance or annuity policy for granted. Insurance giant AIG was “too big to fail” in the financial crisis of 2008–2009, but there’s no assurance that in a future crisis, the government will bail out carriers unable to fulfill their financial obligations.
Don’t count on receiving these payments right away if your company fails. Your state’s insurance commissioner will first try to find other insurance companies to take over policy obligations. If it fails to do so, your state’s guarantee provisions step in. Guarantee payments generally come from an asset pool contributed by state-licensed insurance companies. Only residents of that state may be entitled to payments. If enough insurance companies fail, the asset pool may not be sufficient to pay the guarantees.
For these reasons, it’s crucial to conduct due diligence when you purchase life insurance or annuities:
- Buy only from the highest-rated companies. Unfortunately, major ratings services don’t provide an accurate picture of a carrier’s financial health. All the major services failed to foresee the collapse of AIG, for instance.
- Ask your insurance agent for help evaluating the company’s financial safety. Find out if the company has recently experienced a ratings downgrade. You and your broker can also review media reports, press releases, public filings, and analyst reports to evaluate its financial stability.
- If financially weak companies issued any policies you now own, consider transferring coverage to a stronger company. However, for life insurance, the coverage you receive may be much more expensive than that you gave up, since premiums rise sharply as you grow older. Early termination of the policy may also trigger penalties and tax liability. Don’t cancel one life insurance policy before you qualify for another, in case you’re turned down due to a medical condition. With annuities, you may be able to switch from a weaker company to a stronger one tax-free using a strategy called a “1035 exchange.”
Another strategy to consider is to purchase non-U.S. annuities or life insurance policies. This is perfectly legal under U.S. law, and the companies issuing such coverage often have stronger balance sheets than U.S. carriers. In addition, many countries provide much stronger asset protection for funds in an annuity or life insurance policy than that provided under state law. In addition, you can do a 1035 exchange from a domestic to an offshore annuity.
Reprinted with permission from The Sovereign Society.
Mark Nestmann is a journalist with more than 20 years of investigative experience and is a charter member of The Sovereign Society's Council of Experts. He has authored over a dozen books and many additional reports on wealth preservation, privacy and offshore investing. Mark serves as president of his own international consulting firm, The Nestmann Group, Ltd. The Nestmann Group provides international wealth preservation services for high-net worth individuals. Mark is an Associate Member of the American Bar Association (member of subcommittee on Foreign Activities of U.S. Taxpayers, Committee on Taxation) and member of the Society of Professional Journalists. In 2005, he was awarded a Masters of Laws (LL.M) degree in international tax law at the Vienna (Austria) University of Economics and Business Administration.