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Seniors & Annuities

WARNING TO RETIREES AND SENIORS:
SOME DEFERRED ANNUITIES ARE HAZARDOUS TO YOUR FINANCIAL HEALTH

     With the number of the nation’s senior citizens currently estimated at 36 million and growing, the insurance industry has tapped a goldmine, selling $217 billion worth of annuities in 2005 alone. Unfortunately for seniors, unscrupulous insurance companies, brokers and agents have also been mining their retirement funds at such a furious pace. Rising complaints from the elderly have prompted federal and state regulators nationwide to warn of company-sponsored scams. Since the last six years, the NASD, the brokerage industry’s regulatory arm, filed 286 enforcement actions against brokers involving annuity sales.

     An annuity is a financial product sold by life insurance companies which can provide a retiree with income in a series of regular payments. There are generally two types of annuities. The first is when consumer/policy holder pays a lump sum to a life insurance company which then pays out right away in periodic installments. This type is known as an immediate annuity – the payments start immediately.
The second, and more common, is where money paid by the policyholder accumulates at interest over a period of time. The accumulated amounts will then be paid out to the beneficiary in periodic installments, usually upon retirement, in order to supplement the retirement income. This type is known as a deferred annuity – the payments are deferred for a number of years and include death benefits to survivors.

     Regulators have found that high-pressure marketing employed by these financial predators play on the elderly’s fears, portraying stock mutual funds and federally insured bank accounts as unreliable. In California, the Department of Insurance is seeking $110 million in fines and restitution against AmerUs Group Co., a large annuity marketer. It accused the company of frightening seniors through the use of scripted language into moving their savings into annuities. According to one trial testimony of a former sales trainer, agents are coached to bad-mouth the FDIC, the insurer for bank deposits. Seniors are told of false information about the security of bank deposits, and then urged to move their retirement funds from bank accounts to long-term deferred annuities.

     State regulators say that deceptive sales practices are driven by the rich commissions paid by the insurance companies. On a $100,000 annuity, the agent’s take typically ranges from $3,000 to $10,000, even as high as $16,000. According to California’s Insurance Commissioner, the fat commissions drive the agent or broker to ignore the senior’s financial condition. Most of the victims are locked-in with inappropriate annuities that cannot be accessed when needed without paying substantial surrender penalties.

     Retired senior citizens, largely because of failing physical and mental health, are most vulnerable to deceptive marketing practices. Financial workshops and estate planning seminars offered free to seniors entice them to provide confidential financial information to brokers and agents who mine them for lists of prospective targets. By styling themselves as financial experts and advisors, annuity salesmen can easily gain the trust of seniors who become easy preys to deceptive sales techniques.

     For example, the NASD accused Waddel & Reed, a major annuity broker with offices nationwide, of prodding thousands of its elderly clients to transfer their annuities from one insurance to another. Its sales agents are instructed to disparage the original insurer by questioning its financial strength and quality of customer service. However, investors were never told that by transferring their annuities, they would lose 10-20 % of their investment in early withdrawal penalty. Its agents were then able to switch 6,700 annuities to the new insurer, generating $37 million in commissions for Waddel & Reed, but costing investors a total of $10 million in surrender penalties.

     A widow claims that a broker who sold deferred annuity policy to her deceased husband convinced him to cash in his old annuity and invest the proceeds in a new annuity sold by a rival insurance company which yields a much higher monthly payment. However, hidden under the technical language of the new policy – and left unexplained by the broker – is the fact that benefits under the new annuity will not be paid until the beneficiary is 115 years old. The maturity date of the annuity in question is so far out into the future that, considering the beneficiary’s life expectancy, it is only illusory. Realistically, no one is expected to live beyond 115 years. A promise to pay when a beneficiary reaches that age is nothing but a scam.

     In some other instances, the annuity contract delivered contains terms and provisions that are much different from those desired by the investor or promised by the agent. Some seniors have totally trusted their agents and failed to review the annuity contracts during the free review period. When they need to access the funds, they find out too late that the annuity they obtained is not the same annuity they thought they purchased.

     If you or your elderly parent has been approached by an agent selling a deferred annuity, watch out for the above traps and scams. If a deferred annuity has been purchased, it is in your best interest to immediately review your annuity policy for any possibility that it contains an illusory maturity date that makes it inaccessible during your lifetime.   

© Law Offices C. Joe Sayas, Jr.