Sales of indexed annuities under increased scrutiny
Sales of indexed annuities under increased scrutiny
Oak Harbor couple felt they were misled by insurance agent
By PHUONG CAT LE
P-I REPORTER
Ralph and Shirley Corbin say the insurance agent told them the equity-indexed annuity would pay a 12 percent bonus rate and allow them to take out money whenever they wanted.
Neither was true, but they didn't realize that until later.
The Corbins, of Oak Harbor, agreed to the new annuity but didn't sign or review the required disclosure forms.
Instead, the agent, Jonathan Kruse, forged their signatures on those documents and misrepresented some information on their applications, according to an Office of Insurance Commissioner order revoking his license.
Records show Kruse pitched the same annuity to two others, who complained to state regulators that he misled them about certain features.
In March, days before a scheduled hearing on the revocation of his license, Kruse surrendered his license and told the OIC he "will no longer do any business," according to OIC records.
"He was selling a bill of goods, and lying to do it," said Ralph Corbin, 74, who paid nearly $16,000 in fees to switch to the new annuity.
Kruse, 65, told the Seattle P-I he did not forge the Corbins' signatures and that he chose to retire rather than fight the charges.
"I didn't contest it. I just walked away from it," he said. "I left the whole industry."
Indexed annuities, which are insurance contracts with an investment component, have come under increased scrutiny as sales jumped to $25 billion last year from $14 billion in 2003, according to Securities and Exchange Commission estimates.
Citing a rise in complaints over abusive sales practices, the SEC proposed in June to regulate indexed annuities as securities.
"Many equity-indexed annuities appear to have been marketed to investors who are least able to scrutinize the details," SEC Chairman Christopher Cox said at the time. "It's common for these products to be sold as investments to older Americans who are simply in many cases not suitable purchasers."
Seniors tend to be sales targets, in part, because they have money. Americans 65 and older hold an estimated $15 trillion in assets.
The insurance industry opposes the SEC proposal, saying it will create duplicate regulation and confusion for consumers.
Indexed annuities, which are currently regulated by state insurance commissioners, are complex, and they can be confusing for consumers.
"Many people do not understand how they work and are often pressured into buying them," said Stephanie Marquis, a spokeswoman with the OIC, which regulates insurance agents and all types of annuities.
An equity-indexed annuity is a long-term contract made with an insurance company. It combines the characteristics of a fixed annuity and a variable annuity.
The insurance company guarantees a minimum rate of return in an EIA, and also offers a variable rate based on the performance of an index such as the Standard & Poor's 500. There's an accumulation period, when premium payments are invested in the annuity and grow tax-deferred, and a payout phase, when the insurance company makes payments to the policyholder according to the contract -- whether a lump sum, for a specific period or for life.
The guarantee of future lifetime payouts make them appealing to seniors worried about outliving their nest eggs.
But lengthy maturity periods and stiff withdrawal penalties make them unsuitable for seniors who need access to their cash.
Critics say elderly investors are often sold products that tie up limited savings for too long -- five, 10 or 15 years. If they need to cash out early or withdraw more than what's allowed, they pay penalties that can easily erase their earnings.
In the past three years, the OIC has had 178 consumer complaints involving annuities and 198 complaints against agents selling annuities. During that time, 18 agents were reprimanded, 15 were fined, suspended or had their licenses revoked, and 35 were counseled about their behavior, Marquis said.
"Most agents are acting in good faith for their clients, but there are those who are pressured by the (sales) commission and they push people into products that might ultimately not be right for them or that they don't fully understand," Marquis said.
Last year, the state of Minnesota settled a lawsuit with Allianz Life Insurance Co., one of the nation's largest insurers, over charges it sold deferred annuities, including EIAs, which were unsuitable for seniors. Allianz agreed to change its sales practices and offer about 7,500 seniors a chance to get their money back.
The National Association of Fixed Annuities said it opposes unscrupulous and fraudulent sales practices. It believes consumers should be fully informed of all the conditions and features, and said it's working with regulators to ensure this happens.
Mary Kooistra, a Kirkland elder-law attorney, complained to the OIC a few years ago on behalf of a client who she said was sold an annuity that wasn't suitable for him. Her client, a Bellevue man in his late 70s, put about 85 percent of his savings into a $60,000 annuity that didn't pay out for 10 years, she said.
The problem was that he didn't have any other income and needed the cash, she said. When he had a stroke a few months later and needed to pay medical bills, his family learned he would pay penalties to withdraw his money, she said. The OIC helped him get a refund, Kooistra said.
"It's an OK deal for someone who has a lot of assets and income-tax issues," Kooistra said, "but most elderly aren't in that situation."
For some, indexed annuities can be a legitimate part of a long-term retirement plan. The Corbins already had one before they switched to the one Kruse sold them. But they wouldn't have switched had they known all the conditions, Ralph Corbin said.
According to OIC records, Kruse told them they could take money out when they wished and misrepresented the fact that no annuities were replaced. Replacing existing annuities or contracts would have required certain reviews.
The state had revoked Kruse's license once before in 1990 for "making misrepresentations and forging applicants' signatures on insurance applications," according to OIC's 2008 order. He reapplied for a license a year later, and after a review the OIC reinstated it in 1992. There were no other actions against him until this year.
Kruse said he made a mistake in quoting the Corbins the rate, but quickly corrected it. He said the Corbins got their money back.
When the OIC intervened, Allianz, the insurer, agreed to reimburse the Corbins nearly $16,000, the money they lost when they switched products.
"Make sure you understand the product you're buying and take the time to read the contract," warned Mike Stevenson, head of the DFI's securities division.
"Make sure you look at all your options. Make sure it fits. Look at the cost across all the different choices you have," Stevenson added.
THE FINE PRINT
# Read all disclosure documents and the contract. If you don't understand something, ask.
# Ask about all fees and charges you may incur and when you would incur them.
# Understand surrender charges, which may apply if you need to cash out your annuity before it matures. Some products waive surrender fees under certain situations, including upon death, terminal illness and nursing home confinement, and not all charge surrender fees.
# Consider whether the product makes sense for your own situation and whether it meets your income needs and retirement goals.
# As with all investments, don't put all your eggs in one basket. Diversify.
# Invest only money that you do not want to put at market risk and may need access to in the future.
# Ask yourself how long you want to leave the money in the annuity and whether you'll be able to access your money when you need it.
# How risk-averse are you? Variable annuities have the potential for higher earnings that aren't guaranteed and you could lose your principal. Fixed annuities offer a guaranteed interest rate and little or no risk of losing your principal. Equity-indexed annuities fall somewhere in between.
# An annuity is as solid as the insurance company issuing it. Check the company's financial ratings through Standard & Poor's, standardandpoors.com, 800-523-4534; A.M. Best, ambest.com, 908-439-2200; Moody's Investors Service, moodys.com, 212-553-0377.
# Washington state law provides a 10-day "free look" period when you buy annuities. If you change your mind, you can return the policy within 10 days.
Annuity Definition
