We recently told you about the insurance agent who was convicted and sentenced to jail for selling an illiquid Allianz equity indexed annuity to an 83-year old woman who showed signs of dementia. The focus of this story has been on the agent’s criminal conviction, but agents get such huge commissions for selling these products that many would sign up coma patients if it were legal to move the pen for them. We think more attention should be paid to the fact that the issuing company, Allianz, cleared the sale in the first place. An equity indexed annuity is a complex, illiquid financial product that most experts agree is unsuitable for an 83-year old. In fact, we think equity indexed annuities and variable annuities are patently unsuitable for most people over 65, whether the prospective purchaser seems as unhinged as an old shutter or as sharp as a Ginsu knife.
In 2008, then-Chairman of the SEC Christopher Cox spoke about rampant abuses in the sale of equity indexed annuities to the elderly. Consider these excerpts:
“NASAA [North American Securities Administrators Association] has led the way in exposing the abusive sales practices often used to promote equity indexed annuities to older investors for whom they are unsuitable. So too have the Financial Industry Regulatory Authority (FINRA) and the National Association of Securities Dealers (NASD) before it. Two years ago at the national Seniors Summit here at the SEC, NASAA made public its survey results showing the scope of senior investment fraud. As then-NASAA President Patty Struck put it, the survey revealed a landscape “littered with slick schemes and broken dreams” that has been “devastating” to the victims and their families. The survey of state securities regulators showed that 45% of all investor complaints received by state securities regulators are made by seniors. The survey also found that equity-indexed annuities are among a handful of products most often involved in senior investment fraud.”
“At some point, the investor takes the money out, and, depending on when that happens, the terms of the contract and the performance of the index determine whether the pay-out might be more or less than the money the investor contributed in the first place. That’s the simple part. The complicated part is that a variety of fees and charges, limitations on accumulation, calculations of index values, and other detailed features are baked into equity indexed annuities. And although the contract guarantees a minimum value, that’s typically less than what the investor gives the insurance company in the first place.”
“Surrender charges are another way that investors can find that they get back less money than they put in. The charges can be as high as 15 to 20 percent of the amounts invested. Although the surrender charges decline to zero over time, that process can take more than 15 years. In the meantime, if an investor who buys an equity indexed annuity needs his or her money sooner — for medical expenses or rent, for example — he or she can be forced to forfeit a substantial amount of the investment.
Unfortunately, many equity indexed annuities appear to have been marketed to investors who are least able to scrutinize the details. It’s common for these products to be sold as investments to older Americans who are simply in many cases not suitable purchasers. Three years ago, the NASD, now FINRA, raised concerns about the manner in which broker-dealer personnel were marketing and selling unregistered equity indexed annuities. They also sounded the alarm about the absence of adequate supervision of these sales practices. Today, in 2008, the cause for concern seems greater than ever.”
Notice those last two sentences: the reference to inadequate supervision of sale practices and cause for concern being greater than ever in 2008. That happens to be the year in which the Allianz annuity was sold to our 83-year old victim. Four years later, the agent who sold it is going to jail for a sale Allianz should have refused to clear.
Has anything changed since 2008? Yep. Things may have gotten worse. Sales of equity indexed annuities are way up, with agents pushing “guaranteed returns,” “complete safety,” and “no downside risk.” And recently, we’ve noticed that our web site gets more searches about annuities than any other topic.
If you’re a senior who bought an equity indexed annuity from Allianz, Aviva, American Equity Investment Life, Jackson National, ING, or others, we’d wager you didn’t fully understand what you were buying. In fact, we’d wager that the agent didn’t fully understand what he or she was selling (except for the part about the fabulous commissions.) If you’re not a senior, but you’re concerned about an older relative who may have purchased one of these annuities, or for that matter, any other variable or hybrid insurance/investment product, it would behoove you to check into it further. We may be able to help. Contact us at 866-932-1295, or email Hugh Berkson: firstname.lastname@example.org.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.