Caring Currents

Why You Should Worry When Your Parents Mention the Word Annuity

Where is going the stock market ?????
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If you've been reading stories about the explosion of senior fraud over the past few years, you can't help noticing that the word annuity keeps popping up. In fact, the North American Securities Administrators Association, an association of state regulators, says over one-third of all cases of financial exploitation of the elderly involve annuities. In the past few years, hundreds of class actions have been filed against insurers over annuity sales to the elderly, including one in Minnesota against Allianz Life that involves nearly 400,000 people.

How are annuities getting older adults into trouble?
Let's be clear. Annuities in and of themselves aren't bad. For some people -- typically those who are younger or quite well off -- they might be a good investment choice, depending on circumstances. But as a general rule, most types of annuities are not a good choice for seniors.

The reason? The basic rule of investing for older adults is to keep funds liquid and conservatively invested, since the older you are the more likely it is that you'll need your money sooner rather than later. And a sudden health issue could mean you need it now. Yet annuities typically have a whole slew of rules that make it impossible to get your money quickly or -- if there are penalties or it's declined in value -- at all.

So what's an annuity, anyway?
In simplest terms, an annuity is an investment product that has an insurance policy packaged with it.

The problem is, the insurance companies who create and market annuities surround the policies with a whole slew of rules and regulations that make them very complicated and difficult to understand. Annuities do very different things depending on what these rules and regulations say.

And here's where it gets icky: Many insurance salespeople have been known to sell these "products" to seniors despite the fact that they're highly inappropriate -- even counter -- to their needs. In fact, in some of the frauds that have come to light, sales agents have talked seniors into taking money out of investments that were safe and putting them into risky annuities, causing them to lose their savings.

The problem's become such a big one that many states, such as Florida and California, are trying to crack down on the rising number of annuity scams by enacting new laws. Florida, for example, reported that annuity investigations involving seniors went from 75 in 2005 to 299 in 2008. But the insurance industry has fought back, and the laws are stuck in the legislature. So it's up to all of us to protect ourselves and our families.

What do you need to know about buying an annuity?
First and most important, there are four types of annuities:

1. Immediate annuities: The payments begin immediately.

2. Deferred annuities: Payments don't begin until some set time in the future, usually five to seven years or longer.

3. Fixed Annuities: Your money is invested in lower-risk bonds, bond funds, and the insurer's general account.

4. Variable Annuities: Your money's invested in stocks or stock funds -- notoriously high risk.

These distinctions are important, because they provide an easy guide to whether an annuity product is right for an older person.

Here's What Every Older Person Needs to Know About Annuities:

"¢ Immediate annuities are locked in -- you get a payment stream, but you cannot get your money back if you need to.

"¢ Deferred annuities have hefty "surrender charges" if you need to take your money out before the deferment period's ended. So your money's locked in with one of these, too.

"¢ Variable annuities are essentially another way of playing the stock market.

"¢ Most annuities have hefty fees and management charges.

"¢ Annuities are investments; you're investing in the insurance company or other provider of the annuity. So if that company isn't financially healthy, you could lose your money.

"¢ Agents who sell annuities typically get an up-front commission of 3-8% of the total value of the annuity -- so they have a significant incentive to sell it to you, whether or not it's appropriate.

"¢ All deferred and most immediate annuities are counted as assets by MediCaid, so if an agent is telling you this is a way to park your assets where MediCaid can't see them, this is false.

If you or your family has purchased an annuity under questionable circumstances, we'd like to hear from you. And you can get help by calling your state attorney general's consumer fraud hotline or senior fraud helpline. There are also a number of law firms specializing in class action cases involving annuities.