LawyersandSettlements.com (LAS) First of all, what is an annuity?
Dee Miles (DM): An annuity is a contract purchased with an insurance company that will provide you with an income at a future date; it provides you with a monthly income. An annuity is not an appropriate tool to sell someone over 65 years of age. You can sink a lot of money into a policy and some people have sunk their life savings into one.
LAS: Can you give an example?
(DM): Sure. An annuity is bought with cash - for example, say you buy an annuity for $100,000 and you order that annuity to pay you a monthly income once you reach a certain age. But that certain age has to be over 59.5 years.
LAS: What are the benefits?
(DM): There are no tax consequences. People buy them when they are young and they gain interest, usually at a higher interest than the bank. However, by the time you calculate commission fees and other associated costs, your net return is equal to, or less than, the bank rate. Historically, annuities have always been this way but in the past, rates were always higher. You don't get a good rate anymore. And you have to keep an annuity for a long time in order to make it worthwhile - it takes years for costs and commissions to reduce in order to have good value.
LAS: Who buys annuities?
(DM): Annuities are typically used when a minor comes into a large sum of money and someone wants them to be taken care of later in life. Or they are bought by a young person who is planning for retirement in their later years.
LAS: What is the problem with that?
(DM): These commission sales people from insurance companies such as Allianz are selling annuities to consumers over the age of 65 and using the interest rate as bait or an inducement to get them to purchase.
Here is the problem: Once you buy it, there is a severe surrender penalty that has to be paid if you cash in the annuity early. Your money is locked up and you can't get it out. This penalty can be as low as 5 years to cash in and as high as 15 years. It is based on a percentage that goes down each year.
LAS: Getting back to that example with $100 grand...
(DM): Say you are now 65 and want your money but you originally signed the policy that says you cannot collect until you are 75. To get your money, the penalty can cost (depending upon your contract) as much as 15 percent. In other words, you will have to pay $15,000 just to get your money back.
LAS: Sounds like companies such as Allianz employ loan sharks.
(DM): Exactly. Chances of a 65-year-old cashing in are pretty good, so it happens a lot. Elderly people are conned and that is unfair.
LAS: How can elderly people get scammed so easily?
Because they generally prefer to have a monthly income. Typically, these people are coming out of certificates of deposits with banks and they are being induced to buy the annuity because of the interest rates. They believe their bankers.
LAS: I don't get it. How does the banker play into this and how does the Allianz sales person find these people?
(DM): Recently the American Congress deregulated the banking industry to allow bankers to sell insurance products and securities in the retail area of the bank. There used to be a law called the Glass-Steagall Act -- an act passed in 1933 that stemmed from reactions of the U.S. government to cope with the economic problems which followed the Stock Market Crash of 1929. The acts
(Glass and Steagall) kept banks out of the stock market and created the Federal Deposit Insurance Corporation (FDIC) that guaranteed one's savings if a bank failed.
This 1933 U.S. national law prevented this very thing - banks selling annuities-- from happening. It placed regulation walls between banks and insurance companies and brokerage houses, keeping them separate so you wouldn't have banks selling insurance products and securities because of a potential conflict of interest. However, the banking lobby recently had the walls fall that were placed by this act. The Act was dismantled in 1999 and as a consequence, the distinction between commercial banks and brokerage firms has blurred. Now, many banks own brokerage firms and provide investment services, including annuity sales.
LAS: What can you do to help our senior citizens?
(DM): We are trying to help elderly people, duped by these insurance agents, to get their money back. If you are over the age of 65 and purchased an annuity, you might want to seek legal help with a consumer lawyer.
Dee Miles specializes in consumer fraud at Beasley, Allen, Crow, Methvin, Portis & Miles, P.C.
Phone: 800.898.2034 or 334.269.2343
Email: dee.miles@beasleyallen.com
Website: www.beasleyallen.com