Annuity Scams

What Is Annuity Fraud?

Annuity fraud is committed by unethical insurance agents or annuity providers who prey on susceptible investors and scam them out of money by pushing unsuitable financial products.

While annuities are generally considered safe, the industry can be confusing, and some professionals may use this to take advantage of annuity buyers. Therefore, if you are considering buying an annuity, you should first understand the dangers of potentially working with dishonest players.

Although the industry is regulated by both state and federal agencies, investors and seniors can still be swindled into buying unsuitable products or selling their annuities for unfair amounts.

Key Takeaways About Annuity Scams

• Most annuity fraud cases are based on suitability, where an advisor neglects to share important information, resulting in unexpected costs and other suboptimal financial outcomes.
• Older adults are often targeted for financial scams. 
• Asking the right questions, checking if the insurance agent is properly licensed and confirming the issuing company’s financial strength rating can help you avoid annuity scams. 

Cyrus Bamji, head of communications for the Alliance for Lifetime Income, outlined a few examples of annuity fraud. 

“Overwhelmingly, these annuity fraud cases are based around ‘suitability,’ where an advisor neglects to share important information about a particular type of annuity – including a full disclosure of fees, costs and other contractual features – and persuades a client to buy the annuity, which may not be right for them,” he explains.

“Though rare, other types of annuity fraud include cases where advisors put their name down as the annuity contract beneficiary, so they inherit the annuity instead of a family member, or setting up a fake insurance company and then disappearing with your money once you purchase the annuity,” Bamji told Annuity.org. 

“All of these cases are the very reason why annuities should always be considered within a diversified and comprehensive retirement plan, and not in isolation.”

Annuity Agent Scams

Agents with rehearsed pitches may lie to potential consumers and force them to sit through high-pressure meetings in order to profit from consumer fear.

By promoting contract signing bonuses and today-only deals, agents manipulate investors into buying annuities that may not be suitable for their financial situation. They may also intentionally pitch contracts that are difficult to understand or fail to fully disclose all annuity fees and commissions, setting you up for failure later.

Signs an agent may be trying to scam you:

• High-pressure sales tactics. If an agent is pushing a “limited time” annuity offer that makes you uncomfortable, trust your instincts. If a deal feels too good to be true, it’s likely a scam.
• P.O. boxes. Another red flag is if a salesperson asks you to send money to a P.O. box or an individual or agency. Your funds should also be sent directly to the insurance company you are purchasing the annuity from. Otherwise, you should stop and investigate.
• Living trust mills. Living trust mills involve sales agents who will use your financial information to sell you a living trust or other product that you don’t need.

Salespeople are also known for assuming fake titles or claiming fake certifications to appear trustworthy. Fraudulent advisors can call themselves many names, including financial consultants, trust advisors, senior estate planners or certified senior adult consultants – even though they have no finance or investment background or licensing.

Annuity Scam Targets

Older adults are specifically targeted for financial scams, according to a 2024 report from the U.S. Department of Justice. It found more than 230,000 older victims of fraud from July 2023 to June 2024 alone. Fortunately, the Department of Justice was able to return more than $31 million in lost funds, although this may not always be the case.

Unethical insurance agents target older adults facing deteriorating physical and mental health, using fraudulent sales tactics and suggesting inappropriate investment tools and resources. Some schemes trigger lawsuits and can even turn into class actions. Others go unreported.

Some agents target older adults who are terminally ill, convincing them to purchase annuities that lock away money for more than a decade. “In some suitability cases, which can be classified as senior fraud, certain types of annuities are sold to seniors in their late 80s and 90s or [who] are terminally ill, unlikely to benefit from the stream of guaranteed income.” Bamji told Annuity.org.

These fraudulent agents set up the annuity contract, so any money left in the annuity remains with the agent or insurance company instead of being paid out to the annuitant’s beneficiaries. Agents then collect benefits when the annuitant passes away. 

Another scam targets mentally unstable adults who are made to feel their current investments are unsafe or will run out in retirement. Seniors with dementia and Alzheimer’s – people who already may struggle to make financial decisions – may mistakenly trust an agent by giving them too much financial information and control.

In some cases, law enforcement prosecutes these unscrupulous agents for swindling older adults into purchasing the wrong products, but, unfortunately, not all scammers get caught. Agents can intimidate seniors, making them afraid to come forward. 

Therefore, it’s important to report annuity scams as soon as possible. Be sure to have certified financial advisors or trusted family members in place for protection from scammers. 

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Annuity Twisting and Churning

Life insurance and annuity agents may deceive clients, convincing them to surrender their contracts and reinvest in instruments where the agent is the primary beneficiary. These practices are known as twisting and churning. 

Many states have laws that specifically prohibit these transactions.

Annuity Twisting

With annuity twisting, agents encourage investors to exchange an annuity from one company for an investment from another company. However, subsequent annuity investments are usually worth less than the initial investments, and annuity surrenders often result in costly penalties. 

Agents pushing the new policy then walk away with a large commission.

Annuity Churning

Annuity churning occurs when dishonest insurance agents convince annuity owners to trade annuity contracts for other ones from the same company. Clients may owe additional premiums or lose value on the policies previously owned. 

While the consumers usually come out in a losing position, the agents pad their pockets with sales commissions.

While annuity twisting and churning are fraudulent activities, exchanging an old annuity for a new one isn’t always a bad idea. That said, a good insurance agent or financial professional will always make sure an exchange is beneficial to an annuitant.

Secondary Market Scams

Other annuity scams relate to when annuitants sell annuity payments for cash. The companies that purchase these rights work in the secondary annuity market, with some entering the market specifically to take advantage of the sellers.

Most secondary market scams come from:

• Agents failing to disclose end-of-deal fees
• Contract terms that do not match the verbal terms previously agreed upon 
• Court discovery of unmet state regulations concerning the broker or the sale

In secondary market transactions, the funding company is supposed to incur all costs and fees, including attorney fees and compliance fees. If your quote says you will receive $50,000, and you don’t receive some money up front, then you should receive a check for that amount with no additional fees subtracted.

Over the years, I have had clients who have bought an annuity that was high in fees, didn’t have the guarantees indicated and were truly not suitable for that client. I tell my clients to do good research and to buy an annuity from a reputable, known company. Also, if something looks too good to be true, it’s generally incorrect. Where I have seen issues are with agents and companies promising a client a higher interest rate compared to others and not disclosing the high costs involved. High pressure sales tactics are signs that there is fraud involved. I tell all of my clients to get to know the agent so you are not a part of an annuity scam.

Aamir M. Chalisa, MBA, LUTCF, MDRTGeneral Manager at Futurity First Insurance Group

Aamir M. Chalisa is a seasoned financial services leader with over 30 years of experience in insurance, wealth management and retirement planning. As General Manager of Futurity First Insurance Group’s Oak Brook branch, he oversees one of the company’s top-performing teams. Aamir has held leadership roles at MetLife, Prudential and Nationwide and is a Million Dollar Round Table (MDRT) qualifier, recognized for his expertise in life and annuity sales and commitment to helping clients achieve lasting financial security.

Regulating the Annuity Industry

The annuity industry is regulated at the state level, requiring insurance agents, brokers and companies to obtain selling licenses from the states in which they conduct business. 

The government also oversees annuities, with IRS annuity tax laws also helping regulate their sale and ownership.

Agencies involved in protecting the primary and secondary annuity markets:

• The Securities and Exchange Commission (SEC)
• Financial Industry Regulatory Authority (FINRA)
• The North American Securities Administrators Association (NASAA)

Private rating agencies, such as AM Best, Moody’s and Fitch Ratings, also help protect those purchasing in the industry. Each private rating agency issues insurance companies a financial strength rating, which indicates the likelihood that a company will meet its financial obligations. 

Because annuities are not FDIC-insured, investors must take care to ensure any insurance company they buy annuities from has a strong history and the financial resources to responsibly service their contracts.

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How To Protect Yourself from Annuity Scams

While checks and balances exist within the annuity industry, you still must be diligent about understanding any contracts in which you invest money. This is fundamental to avoiding annuity scams. 

Bamji offers some supplement advice on how to protect yourself from annuity scams.

Don’t Buy an Annuity at a Seminar or Over the Phone

“In terms of protecting yourself from fraud, there are various things you can and should always do. Never commit to buying an annuity at a seminar or over the phone, or provide any personal or financial information, especially with advisors you don’t know well,” Bamji said. 

Pay Attention to Your Check or Wire Transfer

“If you’re purchasing an annuity, make sure your check or wire transfer is made out to the life insurance company (your annuity contract is with them), not the advisor or any other individual.” 

“And, regardless of what type of advisor, including those you trust, always ask for a detailed listing of fees and any other costs, length and time commitments (e.g., surrender charge period), and how the advisor is compensated.”

Ensure the Insurance Agent is Licensed

If you’re getting annuity recommendations from an insurance agent, make sure they’re licensed in your state before making a purchase. The NAIC has a list of each state’s insurance websites to confirm licenses. 

To sum things up, Bamji recommends 10 questions to ask an agent/advisor before purchasing an annuity. 

1. What are the different types of annuities available? What guarantees do they provide? Which one best meets my needs, investment objectives and risk tolerance?
2. What are the specific costs or expenses for this annuity?
3. If I purchase this annuity, how do you or your firm get paid and how much?
4. What are the specific benefits of this annuity?
5. Are there add-on benefits to customize this annuity to my specific needs? If so, what do they cost?
6. What are the associated risks if I purchase this annuity? Can I lose money?
7. How long will my money be invested?
8. How and when can I start receiving my income? What happens if I need to withdraw some or all my money earlier than expected?
9. What other restrictions should I be aware of before I consider purchasing this annuity?
10. How am I taxed on any withdrawals or income taken? How is that different from other investments or financial products?

These questions will help you determine whether the annuity of interest can be a sensible component of your retirement plan.

Annuity Scam FAQs

Writer Anna Baluch contributed to this article.