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Seniors & Annuities

  $7.2 MILLION PENALTY IMPOSED ON INSURERS AND BROKERS FOR ANNUITIES FRAUD

     In 2006, a lawsuit was filed by California’s Attorney General and Insurance Commission against American Investors Life Insurance Company, Family First Insurance Services, and Family First Advanced Estate Planning for annuities fraud. These companies have agreed to settle the state’s enforcement action for a total of $7.2 million in penalties and reimbursements to consumers.

     The multi-million dollar lawsuit accused the companies of tricking senior citizens into buying deferred annuities—long-term financial vehicles—by failing to disclose high penalties for early withdrawal. The annuities offered the possibility of future payments, but only after a lengthy maturity period. Such annuities are generally acquired as long-term investments for future retirement income of younger, working individuals. They are not, however, considered wise vehicles for retired seniors’ savings.

     Under the scheme exposed by the state agencies, Family First sent its agents to seniors’ homes to provide estate planning advice. The agents, who were not licensed attorneys, offered free legal advice to the seniors in setting up living trust and other estate planning documents. Having gained the senior’s trust after preparing the legal documents, the agents returned to the seniors’ homes. Using fancy titles such as “senior financial/estate advisors”, they then induced the seniors to fund their living trust by transferring their retirement funds and other liquid assets into annuities that the agents are selling.

     Fraudulent marketing of annuities usually involves the failure to disclose that seniors would be unable to withdraw annuity funds before the maturity date without incurring substantial penalties. Maturity periods are set beyond the senior’s actuarial life expectancy, sometimes when the seniors are 115 years old. This means that the annuity funds can be paid to the senior without an early withdrawal penalty only after the senior has long been dead. The scheme, known as a Living Trust Mill, is a growing threat to senior citizens who are lured by the “free-dinner seminars” and the fancy titles used by sales agents who pose as financial or legal experts.

     “These companies tricked senior citizens into buying annuities that would not pay out for years and had substantial early withdrawal fees—investments that made no sense for elderly people. California took action against these companies and today’s settlement marks the end of their unlawful practices,” Attorney General Brown said. Insurance Commissioner Poizner agreed, “I refuse to tolerate insurance fraud in California. Targeting our state’s vulnerable seniors to make an extra buck is especially egregious. Today’s settlement is a victory for seniors and all California consumers.”

     The settlement requires American Investors Life Insurance and the Family First companies to pay $1 million in civil penalties and distribute $5.5 million to consumers who purchased the annuities through Family First and incurred surrender penalties. The judgment also requires the companies to pay $700,000 to reimburse the Office of the Attorney General and Department of Insurance for costs incurred during the investigation and prosecution of this case. The settlement requires Family First Insurance Services and Family First Advanced Estate Planning to permanently cease all business operations.

     The continued rise of annuity fraud cases suggests that some insurance companies have not taken serious steps to stop the bilking of seniors. To the contrary, it implies that these schemes are encouraged by the companies for the billions of dollars they generate, and not merely isolated acts of some unscrupulous agents.

     Scam artists have capitalized on the growing popularity of estate planning and living trusts by establishing schemes, known as “living trust mills,” which use the estate planning services as a cover to sell annuities. The sales agents lure seniors with free seminars and sometimes pose as estate planners or financial experts to gain trust, allowing them to review personal financial and investment information.

     Free luncheons or dinners are used to attract seniors where they will be bombarded with deceptive marketing practices. The events are promoted in mailers as “no costs”, “no obligation”, and “nothing to be sold” estate planning workshops. The seniors who attend are enticed to provide confidential financial information which are then used for prospecting seniors. During the events, the investment products are not actively sold. The pitch comes after a few days when the “senior specialists” makes a follow-up call to the senior’s house.

     State regulators say that deczptive sales practices are driven by the rich commissions paid by insurance companies. On a $100,000 annuity, an agent’s take typically ranges from $3,000 to $10,000, even as high as $16,000. These high commissions drive the agent or broker to ignore the unfitness of the annuity to the senior’s financial condition. Some brokers have even made wild promises, such as a $100,000 investment turned into $1 million.

     Retired senior citizens, largely because of failing physical and mental health, are most vulnerable to deceptive marketing practices. Without the protection of caring relatives and friends, they become easy prey to unscrupulous insurance companies, brokers and agents. If seniors or retirees are taken advantage of, they should seek experienced legal help immediately.

© Law Offices C. Joe Sayas, Jr.