Concerns about Variable Annuities

An annuity may be a wise investment because it can pay income to the annuitant for the rest of his or her life. The amount of that income can be fixed or variable. In a fixed annuity, the income payment is typically guaranteed. In a variable annuity, the income amount will fluctuate based on the performance of the investment portfolio. This makes the variable annuity a higher-risk investment, and a variable annuity almost always should be viewed as a long-term investment vehicle. Commercial annuity issuers typically charge various fees to administer, manage, underwrite, and transfer the annuity account to another investment account. When an annuity contract is transferred or replaced, a surrender charge typically applies. Under the new policy, a new surrender period begins again. Commercial annuity issuers may charge additional penalties for early withdrawal.

Seniors have been particularly vulnerable to unscrupulous annuity sellers and fraudulent sales tactics with regard to variable annuities. Currently, there are numerous investigations of commercial variable annuity issuers involving a tactic called “switching.” As mentioned above, fees are typically imposed when a variable annuity account is transferred or switched into a different account. Several annuities sellers and brokerage firms have been charged or are being investigated for unreasonable and unnecessary “switching,” which has provided a windfall in commissions and profits to securities sellers and brokerage firms. The New York Attorney General is currently investigating whether an insurance company allowed lucrative trades for certain investors but did not allow them for other investors. Another company has recently been fined for misrepresenting annuity contract terms and provisions, forging transfer and other documents, and failing to provide suitable investment advice to clients.

California has passed new legislation (amending its insurance code) that targets insurance agents who prey on senior citizens. The new law requires an insurance agent to give a senior citizen written notice in advance before visiting a senior citizen’s home to sell annuities or to make a sales pitch. The senior citizen must be advised of the right to have family members or friends attend, and the insurance agent must also give the names of others who will accompany the agent to the home. The law also addresses “switching.” Agents are prohibited from making materially inaccurate presentations to induce a senior to buy a new policy where a surrender charge must be paid to replace the existing annuity and the purchaser will not receive a substantial financial benefit over the life of the new annuity. Additionally, the law protects seniors from annuity sales that promise to qualify them for Medi-Cal assistance (the state equivalent of Medicaid). The law also increases fines for false and misleading advertisements with regards to the sale of insurance and annuities. All persons who sell annuities must satisfactorily complete eight hours of training before selling annuities as of January 1, 2005.

The National Association of Insurance Commissioners (NAIC) adopted a model regulation in 2003 that establishes standards and procedures for sales of annuities to senior citizens. The seller must provide suitable advice and make recommendations about the purchase or exchange of an annuity based on the senior citizen’s ascertained and actual financial situation and needs. The seller or insurer is “off the hook” if the senior citizen does not provide relevant information that has been requested. An insurer must have a system in place to monitor and supervise any recommendations. Compliance with the National Association of Securities Dealers Conduct Rules regarding suitability will satisfy the requirements for variable annuities. The model regulation exempts recommendations involving direct-response solicitations and certain funded contracts covered under federal law.

Senior citizens should always be aware and beware of hard-pressure sales tactics, a promise that sounds too good to be true, and a promise of tax-exempt income payments. While this list is not exhaustive, alarm bells should go off in the following circumstances:

• You are being asked to switch or replace your variable annuity policy
• You are being asked to give your agent a power-of-attorney to authorize transfers or replacements
• You are being asked to transfer or replace your variable annuity policy without a full explanation and disclosure of surrender charges and new surrender periods
• You are being asked to transfer or replace your variable annuity account with one that offers a substantially similar rate of return
• You are being offered a bonus to transfer, replace, or maintain the account

Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.

Thursday, April 17th, 2008 at 1:57 pm and is filed under Elder Law Newsletter. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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