What is an annuity?
An annuity is a contract a party (usually an individual) makes with an insurance agency. The individual pays the insurance agency a premium and the insurance agency pays that insured individual back over time. There are three different types of annuities: immediate annuities, variable annuities, and deferred annuities. These different types of annuities are often purchased to use as retirement income.
In a deferred annuity, a period of time elapses between the initial premium payment by the insured party and the paying out of the annuity by the insurance agency. In this case, the initial premium accumulates interest before it is paid back out by the insurance agency. Deferred annuities can seem like an attractive investment or form of insurance because of their tax deferred growth factor. This means that interest on the premium accumulates tax-free until it is back in the insured party’s possession. These annuities can be appealing to buyers because of the prospect of regular and “safe” payments that have accrued interest tax-free.
Yet, insurance agencies often mislead potential clients into thinking this is always the case. In fact, deferred annuities do not always yield dependable payments.
What are ways some insurance agencies mislead or misinform their clients about deferred annuities?
Insurance agencies can extend the “deferred” period beyond the client’s expectation. Insurance agencies that sell deferred annuities promise to “defer” payments to the insured party on their initial payment so as to maximize the sum of the payments, but some agencies postpone payments for several years. This can be particularly harmful to clients who are elderly, as the payouts can be deferred until after the insured person’s life expectancy.
Agencies can show the client examples of interest rates that are higher than what the client will receive. Every fixed deferred annuity rate must come with a guarantee. This means that they will provide a guaranteed minimum interest rate for the insured client’s payouts. While selling the annuity, companies may provide charts and graphs of rapid interest growth. Yet, the guaranteed rate is almost always much lower than the projected rates on these charts and graphs. This results in increased expectations on behalf of the insured. Additionally, some companies offer annuities with a higher guaranteed interest rate for the first year followed by a much lower rate in subsequent years. Such policies mislead clients to believe they will receive payouts with much higher interest rates than are guaranteed.
Many annuity packages contain hidden and exorbitant surrender charges. Combined with the first practice of extended deferrals, surrender charges are a way for annuity-selling agencies to make more money at the expense of the client. Once an insured client decides to withdraw the premium before the agency begins its payouts, the client is subject to surrender charges that may exceed the premium and the payouts (citation?). This means that if a client is dissatisfied with the agency and decides to end the annuity package or regain possession of the premium payment, the client will be fined by the agency for withdrawing premium or ending the annuity contract.
Sellers of annuities collect a commission for each package they sell. This commission is a percentage of the total of the premium payment by the client. This means that annuity salespeople have great incentive – and sometimes pressure – to sell annuities. These salespeople also have a great incentive to encourage the client to pay down a high premium; sometimes a higher premium than is financially reasonable or sound for the client. Because annuity salespeople profit directly from the investments of their clients, they may highlight the benefits of a higher premium without going into as much detail about the harms. In addition, this incentive sometimes encourages sellers to sell multiple annuities, a practice that is almost always harmful and unnecessary.
Some deferred annuity packages include a contract within an IRA or 401(k) plan that is redundant and costly. Annuity sellers will sometimes try to include an annuity contract within an IRA or 401(k) plan to convince the buyer that this will aid their tax deferrals and result in higher payouts. Yet, IRA and 401(k) plans are already tax deferred, so the annuity will not provide any additional benefits. These plans can be more costly with no additional gain for the buyer.
Why are the elderly particularly at risk with regard to unethical deferred annuity practices?
Because selling annuities can be so profitable to insurance agencies and annuity salespeople, sellers of annuities are encouraged to sell as many annuities as possible. Unfortunately, the past few years have seen an increased trend of annuity sellers targeting the elderly. This is because older citizens who are retired or approaching retirement tend to have accrued substantial income and are contemplating retirement funds. Annuities can appear very attractive to people in or approaching retirement because they provide a steady flow of monthly income.
However, elderly people also tend to be offered annuity packages that do not fit their needs. For example, some deferred annuities force the client to wait several years before their first payout, which can be financial detrimental to someone living in retirement.
In addition, sellers of annuities are aware that elderly people are more likely to be afflicted with illnesses such as dementia and Alzheimer’s that make it difficult for them to realize or take action in the face of financial exploitation.
What should potential annuity buyers be aware to avoid?
If you already have a steady retirement plan or another existing annuity, you should be suspicious of any person or agency that tries to sell you an additional plan. Additional annuities are almost always unnecessary and can drain your existing funds instead of increasing them.
“Living Trust Mills” are recent scams that lure elderly citizens with free seminars or sales presentations. These presentations and packages often contain false information and are unaffiliated with legitimate insurance agencies. They should be avoided at all cost. This type of scam offers “free” seminars to senior citizens – often held in churches, community centers, and retirement communities – that do not always contain accurate information.
If an insurance agent or annuity salesperson asks for access to your financial information in order to ascertain the safety of those preexisting investments and accounts, be suspicious. Some salespeople misinform seniors about the soundness of their current accounts to intimidate them into purchasing an annuity.
Be wary of any person who claims to be a “trust advisor” or “senior estate planner.” These are not legitimate titles and they often mean the seller is unqualified to sell living trusts.
Lawsuits Have Been Brought Against the Following Companies by The Evans Law Firm Or Previous Firms With Which Ingrid Evans Was Associated
AIG Sun America; Allianz Life Insurance Company; American Equity Life Insurance Company; American International Group; American National Insurance Company; Conseco Life Insurance Company; Fidelity and Guaranty Life Insurance Company; Forethought Financial Group; Jackson National Life Insurance Company; National Western Life Insurance Company; Prudential Insurance Company of America; Standard Life Insurance Company of Indiana.
What companies are top sellers of fixed annuities?
According to the Annuity Report, the following are top selling annuity companies:
- American Skandia
- The Hartford Director
- The Hartford Leaders
- Jackson National Life
- John Hancock
- Met Life
- Ohio National Life
- Pacific Life
- Sun Life
What are some companies that sell deferred annuities to senior citizens?
The following banks and insurance companies are known to sell deferred annuities to senior citizens:
- AIG Annuity Insurance Company
- AIG Sun America
- Allianz Life Insurance Company of North America
- Allstate Financial
- American Equity Life Insurance Company
- American General
- American International Group
- American Investors Life Insurance Company / AVIVA
- American National Insurance Company
- Americo Financial Life and Annuity Insurance Company
- AmerUs Insurance Company
- Aviva Life and Annuity Company
- Bank of America
- Bankers Life and Casualty Co.
- Conseco Life Insurance Company
- EquiTrust Life Insurance Company
- Fidelity & Guaranty Life Insurance Company
- Forethought Financial Group
- Genworth Financial
- Genworth Life Insurance Company
- Great American Life Insurance Company
- Great-West Life and Annuity Insurance Company
- Guggenheim Life and Annuity.
- Hartford Life Insurance Company
- Jackson National life Insurance Company
- John Hancock Lief Insurance Company
- Lincoln Financial Life and Group Insurance (Jefferson Pilot)
- Massachusetts Mutual Life Insurance Company
- Metlife Insurance Company
- Midland National Life Insurance Company
- National Western Life Insurance Company
- North American Company for L&H Ins
- Pacific Life Insurance Company
- Principal Life Insurance Company
- Prudential Insurance Company of America
- Security Benefit Life Ins Co
- Standard Life Insurance Company
- Standard Life Insurance Company of Indiana
- Sun Life Insurance Company of Canada (Sun Life Financial)
- Symetra Financial
- Transamerica Life Insurance Company
- Washington Mutual
- Western-Southern Financial