Variable Annuities and a Free Meal: Risky Recipe
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June and Larry Douglas got a postcard in the mail inviting them to a free dinner at a local hotel. The invitation had glowing testimonials of what previous attendees thought of the educational and entertaining retirement workshop. The meal was nice. They listened to a passionate speaker tell how important it was to invest their money in an annuity. The presentation was very persuasive, so they immediately signed up to transfer all their money out of their 401(k) into a variable annuity with a 20-year payout.
Annuities are a sound investment for some people, but not for others. And the marketing practices are sometimes questionable. It’s crucial for you to know what to watch for and how to understand whether an annuity is the right investment for you.
Dine and Dash—Out the Door
One of the concerns about annuities is some very questionable marketing practices. Annuities are widely promoted at educational workshops in restaurants set up by so-called investment advisors, financial planners or senior specialists. After the free food they urge folks to exchange their current investments for variable or equity indexed annuities. The testimonials are glowing; the charts and graphs impressive. Frequently, the investors are told to run home to get their mutual fund, brokerage and bank statements so the promoters can calculate how big the annuity should be. The pitch may be designed to scare the investor to thinking their money is at risk and only an annuity will protect them.
The “senior specialists” may have an alphabet soup of letters after their names but no significant training in financial planning. And they may not have the right licenses for what they are selling. The sales pitches are often misleading—or flat-out wrong—but they can be irresistible to some older investors on fixed incomes. Agents who weren’t sufficiently convincing at the restaurant may show up at the investor’s home to continue the pressure to make a sale.
The Securities and Exchange Commission, NASD, and your state securities regulator are cracking down hard on these hard-sell investment seminars. As SEC Chairman Christopher Cox said, “Instead of a legitimate sales seminar and a free meal, seniors are being exposed to pitches for unsuitable products, with high-pressure sales tactics and wild claims about projected returns, and no disclosure of the actual risks of the investment.”
These investment contracts often carry high commissions, onerous fees and surrender charges—the hefty charges that must be paid if an investor pulls money out of an annuity early. In some cases, annuities can increase the investor’s tax burden and can stick heirs with large tax bills. Once the investor starts withdrawing money from an annuity, the capital gains are taxed as ordinary income rather than at the lower capital-gains rates.
Other problems with annuity sales happen when investors who already own an annuity are encouraged to switch to a new one. In many cases this results in new sales charges, commissions and surrender penalties that only benefit the sales agent.
Annuities can provide a lifetime stream of income, so they are more likely to be suitable for younger persons as a part of their overall retirement plan. The problems arise when they are sold to older investors who may not live long enough to enjoy any of the benefits of an annuity.
Check it Out Slowly
- Be sure you understand all the terms. Annuity contracts come with many, many options. You must do your homework before you buy!
- Compare the sales commission to other investment opportunities. Annuity sales commissions are some of the highest in the industry.
- Know the tax consequences when you move money out of your 40l(k) or other investments into an annuity, when you start receiving annuity payments, and when you die.
- As with all investments, diversify so you don’t tie up too much of your liquidity in annuities.
Annuities are long-term investments.
- The older you are the less likely an annuity is right for you.
- Understand the surrender charges in case you need to get to your money in an emergency.
Annuities are a mix of insurance and securities.
- In some states annuities and their sales agents may be regulated by the insurance commissioners; in other states by the securities department. Before you buy an annuity, check with either or both to verify that the product is registered and the sales agent is appropriately licensed.
Help after the Sale
If you were pushed into purchasing an annuity through high pressure sales tactics at an investment seminar, did not get full disclosure of the product’s terms, or the product is very unsuitable for your age and circumstances:
- First contact the supervisor of the person who sold you the annuity to cancel the sale.
- Then call “up the ladder” of the insurance carrier or financial institution backing the annuity and say that you want a refund without penalty.
- Next contact your securities commissioner (or insurance commission in some states) for help in setting aside the contract.
- Also complain to the National Association of Securities Dealers and the Securities and Exchange Commission.
- In states where annuities are regulated by insurance commissions, contact the National Association of Insurance Commissioners.
AARP Resources
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Because your Money Matters, get more tips and action steps on Annuities - PDF file |
Additional Resources:
Annuity Truth
H.E.L.P., a California-based advocacy group for seniors, explains how annuities work and what promises to watch for.
National Association of Insurance Commissioners
“Seniors: Educate Yourself on Annuities”
NAIC has questions you should ask yourself before purchasing an annuity.
Securities and Exchange Commission
“Variable Annuities: What You Should Know”
The SEC details the many options in annuities and the risks for older investors.
NASD
“Should You Exchange Your Annuity”
Before you exchange your annuity for another one, know the tax consequences.
The AARP Foundation and the Investor Protection Trust (IPT) have teamed up to create The Campaign for Wise and Safe Investing.TM
This national educational and awareness campaign strives to protect Americans against investment fraud which can erode retirement assets.
