- Most annuity fraud cases are based around “suitability,” where an advisor neglects to share important information, which results 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.
What Is Annuity Fraud?
Annuity fraud is committed by unethical insurance agents or annuity companies who prey on susceptible investors and scam them out of money by pushing unsuitable financial products.
While annuities are known to be safe and useful financial tools, the industry can be confusing and some use this to take advantage of annuity buyers. Anyone considering investing in annuities should understand the dangers of potentially working with dishonest players.
Although the industry is regulated by state and federal agencies, investors and seniors can still be swindled into buying unsuitable products or selling their annuities for unfair amounts.
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.”
“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 have them sit through high-pressure meetings to profit from consumers’ 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 or fail to fully disclose the maintenance and withdrawal fees.
- High Pressure Sale 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
- If a salesperson asks you to send money to a P.O. box or to an individual or an agency, rather than the insurance company you are purchasing the annuity from, you should be suspicious 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.
Signs an agent may be trying to scam you:
Salespeople are also known for taking on fake titles or claiming they have fake certifications to appear trustworthy. Some fraudulent advisors call themselves financial consultants, trust advisors, senior estate planners or certified senior adult consultant, even though they have no finance or investment background or licensing.
Before you sign any paperwork, make sure your agent is properly licensed. For your own security, confirm any payments you make are going to the insurance company, not the agent or their agency.
Annuity Scam Targets
According to the Federal Bureau of Investigation (FBI)’s 2022 Elder Fraud Report, older adults are specifically targeted for financial scams. According to the report, there were more than 88,000 victims of fraud over the age of 60, resulting in $3.1 billion in losses in a single year. The same report found an 84% increase in total losses to seniors compared to the previous year’s report.
Unethical insurance agents target older adults facing deteriorating physical and mental health. They use fraudulent sales tactics and suggest inappropriate investment tools. Some schemes trigger lawsuits, even 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 that 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 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 won’t last through retirement. Seniors with dementia and Alzheimer’s – people who already may struggle to make financial decisions – mistakenly trust an agent with too much financial information and control.
In some cases, law enforcement catch unscrupulous agents and prosecute them for swindling older adults into purchasing the wrong products. However, not all scammers get caught. Agents can intimidate seniors, making them afraid to come forward. It’s important to report annuity scams as soon as possible and have trusted certified financial advisors or family members in place for protection from scammers.
You can report annuity fraud to FINRA through its online form or call the U.S. Office of Personnel Management (OPM) hotline at 977-499-7295.
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 main party benefiting. These practices are known as twisting and churning. Many states have laws that specifically prohibit these transactions.
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” 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.
“Twisting” and “churning” are fraudulent activities, but exchanging an old annuity for a new one isn’t always a bad idea. That said, a good will always make sure an exchange is beneficial to an annuitant.
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Secondary Market Scams
Other annuity scams relate to when annuitants sell annuity payments for cash. The factoring companies that purchase these rights work in the secondary annuity market, and some enter 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 not matching the verbal terms that were agreed upon
- The court discovering the broker did not follow all state regulations of a sale
In secondary market transactions, the funding company is supposed to incur all costs and fees – such as 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.
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. IRS tax laws also help regulate the sale and ownership of annuities.
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, like AM Best, Moody’s or 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 a company will meet its financial obligations.
Because annuities are not FDIC approved, investors must take care to ensure any insurance company they buy annuities from have a strong history and the financial resources to responsibly service their contracts.
How To Protect Yourself from Annuity Scams
While checks and balances exist within the annuity industry, you still need to be diligent about understanding any contracts in which you invest money. This is fundamental to avoiding falling prey to a scammer. Bamji offers some supplement advice on how to protect yourself from annuity scams.
“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.
“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.”
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. These questions will help you determine whether the annuity of interest can be a sensible component of your retirement plan.
- What are the different types of annuities available? What guarantees do they provide? Which one best meets my needs, investment objectives and risk tolerance?
- What are the specific costs or expenses for this annuity?
- If I purchase this annuity, how do you or your firm get paid and how much?
- What are the specific benefits of this annuity?
- Are there add-on benefits to customize this annuity to my specific needs? If so, what do they cost?
- What are the associated risks if I purchase this annuity? Can I lose money?
- How long will my money be invested?
- How and when can I start receiving my income? What happens if I need to withdraw some or all my money earlier than expected?
- What other restrictions should I be aware of before I consider purchasing this annuity?
- How am I taxed on any withdrawals or income taken? How is that different from other investments or financial products?
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Annuity Scam FAQs
Report annuity fraud through the Office of the Inspector General’s online hotline complaint form or dial 877-499-7295.
Yes, in some cases, you can get your money back from an annuity. Some have a free-look period, when you can terminate your contract and get back your money with no surrender charges.
Fraudulent agents can’t steal an annuity, but they can sell you an unsuitable annuity to get a large commission from you or sell your annuity for unfair amounts.