Ethics Case: Selling Equity Index Annuities
This case is presented as anethical dilemmabecause 1) of the potential for harm to one or more stakeholders, and 2) because of the potential issues of honesty, reputation, and fairness. Ethical dilemmas involve decisions of competing values.
Background:
An indexed annuity in the United States is a type of tax-deferred annuity whose credited interest is linked to an equity index — typically the S&P 500 or international index. Unlike equity funds, it guarantees a minimum interest rate (typically between 1% and 3%) if held to the end of the surrender term and protects against a loss of principal. The returns may be higher than fixed instruments such as CDs, money market accounts, and bonds but not as high as market returns (which do not have a guaranteed return). Equity-indexed annuities usually carry a surrender charge for early withdrawal (ranging from 3 to 16 years). The penalties can be as much as 18 percent of the principal invested.
Scenario
The case presents a video in which one insurance agent advises against the investment because the prospect is older and may have to withdraw the money in the next ten years or so (and hence would incur a substantial surrender penalty), while another agent suggests that the product is a good hedge against the downside of a market collapse, and just needs to be supported by additional insurance products (like long term care insurance) that would reduce the need to have to make an early withdrawal. Assume that the marketing materials explain the surrender penalties in detail.
What are the alternative courses of action for an agent facing this dilemma and the implications for stakeholders based on the agent’s course of action?
The agent seemed to take a Caveat Emptorapproach (where the buyer alone is responsible for checking the quality and suitability of the product). What would be the consequences if all agents acted in the manner that this one did? Would society be better or worse off?
The following are different approaches in which people use to resolve ethical dilemmas:
Follow the golden rule and treat others the way you would like to be treated (or would like to see a family member treated)
Think of a person of strong character and ask yourself what that person would do.
Act in a way that you would be comfortable explaining to a family member (or the media)
Avoid actions that violate core values like honesty, fairness, or trust and that would make you feel uncomfortable afterwards
Act in a way that provides the greatest good for the greatest number of people
Avoid action that violates the rights of an individual (i.e. right to privacy for example)
Which of the above approaches most closely resembles your own way of resolving this ethical dilemma? Why?
Considering ALL stakeholders and your approach for resolving ethical dilemmas, what do you think is the best course of action for the agent? Identify the relative strengths and weakness of your proposed course of action.