RETIRED librarian, Ruth Cline, who, together with several other seniors in her community, received an invitation to a seminar with a free meal offered by a business called Pinnacle Investment Advisers. With the free meal came a menu of tips on Medicaid planning, IRAs, and tax-efficient income. However, Pinnacle’s goal was really to sell an indexed deferred annuity to its senior audience.
The annuities were touted as investments that will rise when stocks rise but will not go down when stocks go down. Thus, Pinnacle persuaded Ruth to hand over her retirement savings to buy the annuity they were selling. However, Ruth had to transfer her money from another annuity she had bought from Pinnacle 6 years earlier. Pinnacle advised her to move out of that earlier annuity and into the new version. Because of this switch Ruth was hit with an early-withdrawal penalty of 16% of her $98,000 account balance. Ruth complained to state regulators. Investigation revealed that 14 other seniors had switched onto the new index annuities and lost a total of $208,000 in surrender fees while Pinnacle earned $126,000 in commissions.
Good for the brokers, good for the company. But bad for these seniors.
Or consider the case of 70-year old Josephine Passanisi, a retired small-business owner, who gave her life savings worth $275,000 to insurance agent Larry Krakow to invest in an Allianz index annuity. Krakow never explained that Josephine would not be able to touch her money until 15 years later, when she would be 85 years old. Josephine did not want this. But to get her money back, she had to pay a 12.5% penalty. Josephine complained to state regulators, who suspended Krakow’s license. Allianz eventually refunded her money in full.
Retired couple Celina and Alberto Grubicy, 66 and 65 respectively, bought two Allianz index annuities totaling $1.1 million from agent Mitchell Storfer. The terms of each annuity were spelled out in the contract, which neither Celina nor Alberto understood. So they relied on what the agent told them.
However, the agent misrepresented the interest-rate calculation. The agent said they would earn interest of up to 36% per year. This was not true. After investigation, Storfer’s license to sell insurance products was revoked and Allianz refunded the Grubicys’ money.
The above cases, as reported by Money Magazine, are hardly unique. In fact, they show how widespread the problems are with index annuities. These problems have been in existence for years, ever since index annuities were created in the 1990’s. Among the complaints include:
1) Deceptive Marketing. Overly aggressive marketing practices invite seniors to “seminars” appearing to be educational or informative but which are actually sales pitches. The seniors do not realize that the “discussions” over the free lunch or dinner were designed to ultimately get them to buy a product unsuitable for their needs.
2) High Commissions. With commissions as much as 9% in some cases, agents are tempted to focus on selling the product to get the commissions. This scenario is ripe for all kinds of abuses against the senior consumer. In a class action our law firm is currently prosecuting, we alleged that the insurance company secretly shifted the high costs of the agents’ commissions by shaving off monies from the annual yields to be paid to the retirees.
3) Surrender Penalties. Annuities were meant to be held long-term and they impose penalties for early exits. Surrender charges as high as 20% are imposed on buyers who want to cash out before 10 or more years have passed. For someone who bought $100,000 of annuity, that’s $20,000 of their hard-earned money they will never see again.
4) Bogus “Bonuses.” Agents who persuade buyers to cash out early argue that a sign-up bonus is going to make up for the surrender penalty they will incur. That bonus has to come from somewhere in exchange for something. Thus, the bonus is recouped through higher surrender fees or lower caps on returns.
5) Complicated Product. An annuity is complex and even agents themselves often do not understand just how annuities work. Even some insurance companies recognize the confusion brought about by the complexity of annuities and will not sell them.
The promise of a safe investment that generates a steady income in their twilight years appeals to seniors and retirees. There are ways to achieve this. Buying an index annuity with the above features is not one of them.
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C. Joe Sayas, Jr., Esq. is an experienced trial attorney who has successfully obtained significant results, including several million dollar recoveries for consumers against insurance companies and big business. He is a member of the Million Dollar-Advocates Forum—a prestigious group of trial lawyers whose membership is limited to those who have demonstrated exceptional skill, experience and excellence in advocacy. He has been featured in the cover of Los Angeles Daily Journal’s Verdicts and Settlements for his professional accomplishments and recipient of numerous awards from community and media organizations. His litigation practice concentrates in the following areas: serious personal injuries, wrongful death, insurance claims, unfair business practices, wage and hour (overtime) litigation. You can visit his website at www.joesayas law.com or contact his office by telephone at (818) 291-0088.
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