An engaging 84-year-old, Bill showed up at a lunch workshop just after Thanksgiving, and had brought all his paperwork with him. Like so many others, Bill had sensed that “something just wasn’t right” with his investments, and decided to jump on the opportunity for professional help when he saw a “Got Annuities?” workshop ad.
Hidden Strategy: Annuity Surrender Charges
It turned out that Bill and his wife, Amy, had just purchased a new index annuity for $150K (almost all of their money). With a 15-year surrender period, Bill will be 99 before he gets out of the penalty box. But the product has strong guarantees, the salesman said: in fact, Bill and Amy are guaranteed to break even in ten years, when Bill is 94. If they needed the money now (like to pay for an operation for Amy), the surrender charge is something like $30,000. Worse still, the agent involved had convinced them to surrender an essentially identical index annuity to buy this one, incurring something like $40,000 in surrender charges on that one!
But here’s the real kicker: Amy is four years younger and has a statistically much longer life expectancy than Bill, being younger and a woman to boot. In recognition of this, the agent said, they should make Amy the annuitant, which is what they did. Of course, what this really means is that if Amy dies first, the surrender charges are forgiven, but if Bill dies first (which is clearly the way to bet) Amy is still stuck with the sky-high charges!
The Real Motive
Why would the agent set things up so that what the customers wanted to avoid (and the agent pointed out) would actually happen?
Can you guess?
Hint: a one-word answer, beginning with “c.”
That’s right, commissions! Try singing it to the tune of Fiddler on the Roof’s “Tradition.” Commissions, commissions! Commissions!
Sorry. It is likely that the agent made Amy the annuitant either because 1) the insurance company reduces commissions after a certain age for the annuitant or 2) the insurance company will not issue the product for annuitants past a certain age, and Bill was too old to serve as the annuitant.
The reason for this is simple: all annuities, being annuities/life insurance contracts, are designed to annuitize or pay death benefits at some point in the future. That’s what makes them annuities. The older the annuitant is, the shorter the time before this inevitable event. The shorter the company can expect to keep the money, the less they will pay in commissions to get it.
So Bill and Amy got exactly what they did not want, and what the agent said he would help them avoid, just so the agent could get paid an estimated $23,000 off the dwindling nest egg of these sweet old folks.
What’s Next?
There are obviously a number of potential violations involving this sale (inappropriate, poorly explained, twisting/churning, material misstatements regarding annuitant selection) and data is still coming in on this case.
But Bill and Amy are likely to complain, and stand, I think, a good chance of getting their money back, plus the surrender charges on the product they were twisted out of.
The preceding story is based on an actual situation and was shared by an investor we met in our professional practice. The names and non-material details have been changed to protect identities. The essential facts dealing with product representations and sales practices have been faithfully recorded.
This case history may amaze, amuse, and incite you. It may also inspire you to take action if you had a similar experience.
Most importantly, this case study may help you to realize that you are not alone, if you feel that you may have been subject to less-than-forthcoming annuities sales tactics. From the high number of cases we’ve seen like this, we can only infer this kind of monkey business is too common where these products are concerned.
Camarda offers free Portfolio Stress Tests which can include annuity cost/benefit analysis and rescue plans. To request one just click here – no cost or obligation.
