Annuities are contracts sold by life insurance companies that guarantee a fixed or variable payment in the future. An investor makes a payment or payments to a company, and the company agrees to make periodic payments to the investor, starting at a future date. When used correctly, they can provide a lifetime stream of income. While annuities may make sense for younger people, they typically are not a good fit for seniors who may not live long enough to reap the benefits of ownership, particularly when they are not told how the products are designed or what their terms are.
Abuses in the sale of annuities are common and tend to show up even more during tough economic times. The catalyst often is advertisements for seminars featuring a free meal and investment advice. Often the guidance that advisors offer can be disastrous, especially when they target older investors.
AARP recently asked some of its members in Texas for feedback on their experiences with the purchase of annuities. We got an earful of heartbreaking stories in return. Hidden fees, excessive surrender charges and slick sales pitches that deceive trusting buyers were among the most common complaints. People are losing money, and they are angry.
George Mosier, a retired Baptist minister from Dallas, told us he saw $18,000 of his savings evaporate in the past 12 months. Pat Williams, a Houston resident, said that since she retired six years ago, “annuity peddlers have been swarming like bees,” flooding her mailbox with invitations to free stake dinners. “These guys are fast talkers… they can convince the ‘average Joe’ that one of the annuity plans they are peddling is the only hope they have for surviving retirement.”
Compounding the problem are people claiming to be “senior specialists”, who despite having an alphabet soup of letters after their names, possess no significant training in financial planning. They offer advice that is misleading or flat-out wrong.
Getting money out of the account can be tricky, says Susan Sparkman of Texarkana. “I’m stuck and cannot get out of the policy with a huge penalty,” she said. “I just cannot believe anyone is allowed to sell a policy that will hold you hostage until you die.”
Thankfully, the Legislature passed and the governor signed earlier this year two bills to reduce annuity penalties and outlaw phony “senior specialist” designations. Also signed into law were bills to ensure that insurance agents are better trained and certified to offer complex products like annuities and Medicare Advantage products.
During the interim, AARP is committed to working towards successful implementation of bills signed by the governor. AARP will continue to work with House and Senate members to address ongoing financial security issues through the Sunset review process and interim studies before the Legislature returns to Austin in 2011.