Annuity schemes cost elderly millions

Some market `income-for-life' deals without disclosing substantial fees

April 25, 2006|By JOSH FRIEDMAN | JOSH FRIEDMAN,LOS ANGELES TIMES

Maydeen Tharp wanted a living trust. She wound up buying a $230,000 annuity.

Tharp, a widowed homemaker, had invited an insurance man to her home in Upland, Calif., to get her estate in order. The salesman shifted the conversation to a different subject: annuities. Then he asked whether they could move outside to the back patio so that her cats wouldn't trigger his allergies.

The salesman talked for hours. The November afternoon grew cold and dark.

Finally, Tharp gave in. She agreed to move the bulk of her retirement savings into an annuity.

"He was so talkative he could sell you anything," recalled Tharp, 69. "After five hours, I was so tired and cold, I just wanted to make him go away."

Tharp had second thoughts the next day and was able to get her money back with help from her financial adviser. Thousands of other elderly Americans have not been so fortunate.

Investment brokers and insurance agents are selling annuities to the nation's 36 million senior citizens at a furious clip, often through deceptive or high-pressure tactics. Annuity sales reached $217 billion last year, nearly triple the amount in the early 1990s.

Using come-ons honed by marketing experts, unscrupulous agents play on seniors' fears by suggesting that stock mutual funds and even federally insured bank accounts are too shaky to depend on. They depict annuities as a secure alternative without explaining the accompanying fees and restrictions.

Some sales agents offer estate-planning services or free financial workshops for seniors to gain access to their financial information. Then they zero in on those with sizable assets, delivering a hard sell for annuities regardless of whether they meet the clients' needs.

Annuities are contracts that promise fixed or variable payments in the future. Salespeople sometimes don't mention the "surrender" charges that apply if buyers withdraw more than modest sums in the early years of an annuity.

Murray H. Cheves, a 90-year-old retiree from San Luis Obispo, Calif., bought a $100,000 annuity in 2001 with withdrawal penalties that lasted 10 years. Cheves would have had to live to 100 to have unfettered access to his money.

Instead, he died at 91, and his heirs were slapped with an $11,000 surrender charge.

"Our older citizens, understandably concerned with rising living and medical costs and even pension uncertainties, are being targeted by unscrupulous financial predators," said William F. Galvin, Massachusetts' top securities regulator, who has brought complaints against annuity providers.

The NASD, the brokerage industry's regulatory arm, has filed 286 enforcement actions over annuity sales in the past six years, including 88 in the 12 months that ended in November, the most ever for a single year.

Regulators say deceptive practices are driven by the prospect of rich commissions. On a $100,000 annuity, the agent's take typically is $3,000 to $10,000, although it can reach $16,000, according to industry experts.

"In many cases, the agent or broker ignores the senior's circumstances and locks him into an inappropriate annuity, and fat commissions are the motivation," said California Insurance Commissioner John Garamendi.

Annuities allow people to shield retirement savings from taxes for years and then receive regular payments, much like a pension. When investors die, their estates generally can get lump sums equal to at least what they contributed.

Surrender charges, however, can be in force for up to 20 years. During that period, investors who take out more than 10 percent of their money in any year can be subject to steep penalties. In addition, investment gains are diminished by commissions paid to sales agents and by fees for insurance features.

Proponents of annuities say abusive sales practices are far less widespread than regulators contend. They say their products make sense for many people, including older Americans.

"The people who are doing right in this industry are not greedy with their earnings, and the great majority of us don't buy mansions and Jaguars at the expense of seniors," said Mark Kennedy, a Woodland Hills, Calif., financial adviser who is a member of the insurance industry's Million Dollar Round Table of top sales producers.

Los Angeles billionaire Eli Broad, who founded SunAmerica Inc., one of the nation's biggest annuity providers, notes that the products are unique among investments because they can provide guaranteed income for life.

"People are living how many years now? If they start investing at 65, they need a variable annuity more than they need a mutual fund," said Broad, 72. "They need a guarantee that if something bad happens to the stock market, they or their heirs will get their money back."

But Broad conceded that people of advanced age should be leery of annuities. An 85-year-old, for example, might see only a few months of payouts.

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