Annuity Scams

Buying and selling annuities demands a major financial commitment. Consumer should be cautious of profit-driven insurance companies and agencies that prey on seniors and other investors by selling unsuitable products.

Anyone considering investing in annuities should know the dangers of working with unscrupulous insurance agents. Although the industry is regulated by a number of state and federal agencies, incidents still occur in which new investors and seniors are swindled into buying unsuitable products.

You can protect your resources and become better prepared for retirement by learning which contracts are too good to be true and end up costing you money in the long run.

Preying on Seniors

Seniors make up 30 percent of fraud victims, according to consumer advocacy group Consumer Action. And when they fall prey to scams, they generally fall hard. The Certified Financial Planner Board of Standards surveyed 2,649 financial planners, finding that seniors who are victims of financial abuse lose an average of $140,500.

Unethical insurance agents prey on seniors who are facing deteriorating health and mental states. They use fraudulent sales tactics and peddle inappropriate investment tools. Some schemes trigger lawsuits, even class actions. Others go unreported.

Agents target older seniors and seniors who are terminally ill, convincing them to purchase annuities that lock away money for more than a decade. Agents set up the annuity contract so that any money left in the annuity remains with the agent or insurance company or agent, instead of beneficiaries. Agents then collect benefits when the client passes away. Another scam preys on the mental state of seniors, who are made to feel that their current investments are unsafe or won’t last through retirement. Seniors with dementia and Alzheimer’s – people who already may struggle make financial decisions – mistakenly trust an agent with too much financial information and control.

In some cases, law enforcement catches agents and prosecutes them for swindling seniors into purchasing the wrong products.

But not all scammers get caught. Agents can intimidate seniors, making them afraid to come forward. In those cases, seniors receive no restitution and have to live with a financial mistake.

Tricks of the Trade

Seniors aren’t the only targets of annuity scams. Agents with rehearsed pitches may lie to clients and have them sit through high-pressure meetings in an effort to profit from clients’ fears.

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 can also intentionally pitch contracts that are difficult to understand. They can also fail to disclose fully the maintenance and withdrawal fees.

Salespeople may describe themselves as financial consultants even though they have no finance or investment background or licensing. They may use fake credentials and claim they have employees who have degrees and qualifications that are inaccurate.

Before you sign any paper work, make sure agents are properly licensed and any payments are made to the insurance company, not the agent or agency.

Twisting and Churning

Life insurance and annuity agents may deceive clients, convincing them to reinvest in policies where the agent is the main party benefiting. Many states have laws that specifically prohibit these transactions.

In a practice known as twisting, agents encourage clients to exchange an annuity from one company for an investment from another company. In reality, the second investment is worth less. Clients purchase another annuity believing the new policy offers greater advantages but in reality surrender charges from the older policy are costly. Agents pushing the new policy then walk away with a large commission.

Annuity churning occurs when unscrupulous insurance agents convince annuity owners to trade one annuity policy for another one from the same company. Clients may owe additional premiums or lose value on the policy they previously owned. By selling a different policy, agents collect a commission.

Changing an old policy for a newer one isn’t always a bad idea. However, it is an agent’s responsibility to make sure the replacement is in the client’s best interest.

Secondary Market Scams

Because owners of some annuities and structured settlements can cash out their investments, trading long-term money for cash now, fraudsters sometimes enter this market, known as the secondary annuity market.

The chief scams here come when sales people fail to disclose end-of-deal fees, when the on-paper terms don’t match the verbal terms that were agreed upon and when the court discovers the secondary market broker did not follow all state regulations of a sale.

In secondary market transactions, all costs and fees – attorney fees and compliance fees – are supposed to be incurred by the funding company and not passed on to the seller. If you are told through a quote that you will receive $50,000 for your annuity cash-out, that’s what the check should be (unless you received some up-front money).

One scam that seems to be targeted toward California residents involves another type of bait-and-switch in the selling process. Right now the courts in California are backlogged with cases, and it takes longer to get on a court docket in that state than it does in other states. And this is what some unscrupulous factoring companies try to use to their advantage.

Sellers often get a quote from a reputable company and learn that their proposal won’t make it to court for 60 days. Since many people want their money faster, people who hear this two-month news often reach out to another company and tell them the issue. And that second company, in an effort to win a customer, will promise a 30-day court date even though they know it will never happen. They will try to get the annuitant to sign a contract for the transfer in the hopes the seller will not discover the fact that the court date is, in fact, 60 days away.

Regulating the Annuity Industry

The annuity industry is regulated at the state level, as insurance agents, brokers and companies must obtain selling licenses from the state they reside in. Tax laws set forth by the Internal Revenue Service also help regulate the sale and ownership of annuities.

There are a few agencies involved in protecting the primary and secondary annuity markets. The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) oversee the variable annuity market, as agents must possess a securities license to sell these. The North American Securities Administrators Association (NASAA) assists in regulating state securities.

Another protection for this industry is through rating agencies for the companies issuing and purchasing annuities. AM Best, Moody’s, Standard & Poor and Fitch are all companies that can review businesses before you proceed with sales. Because these investments are not guaranteed by the Federal Deposit Insurance Corporation (FDIC), investors want to ensure that the company they work has a strong history and the resources to be responsible with funds.

Protect Yourself

While checks and balances exist within the industry, you can still take responsibility for evaluating a contract you’re considering. Annuities come with a 30-day, free-look period, during which contracts may be cancelled without penalty. Utilize this time to answer any questions you have about your policy.

These tips can help you find an annuity without putting your assets at risk:

  • Pay attention to annual maintenance costs. You want to choose an annuity with low yearly fees.
  • Avoid signing up for a premium bonus, because you will typically pay for this with surrender charges in the long run.
  • Understand liquidity issues with owning an annuity, as withdrawals come with fees and IRS tax penalties.
  • Talk to a tax professional and don’t mistake tax deferment to mean no taxes.
  • Be aware that agents will get higher commissions for variables annuity sales (annuities tied to market fluctuations).
  • Have a trusted friend, relative or attorney present when reviewing and signing policies.
  • Avoid annuities with surrender schedules that last more than seven years.
  • Make sure surrender charges are less than 14 percent of the principle.
  • Don’t put more than 35 percent of assets into annuities.

Remember, as you near retirement, you want to find investment products suitable to your assets, present needs and future goals. Annuities may be a helpful supplement to a portfolio but are not the solution for every investor.

Page Sources

  1. Consumer Action. (2009). Elder Fraud. Retrieved from http://www.consumer-action.org/downloads/english/2009_Elder_Fraud_Lesson.pdf
  2. Bigelow, K. (2014, November 19). Living Trust and Annuities Scams. San Diego State University. Retrieved from http://theacademy.sdsu.edu/programs/Project_Master/handouts/Living%20Trust%20and%20Annuities%20Scams-FINAL.pdf
  3. Ellis, B. (2012, August 22). Senior victims lose average of $140,500 to financial abuses. CNN Money. Retrieved from http://money.cnn.com/2012/08/22/pf/seniors-financial-abuse/