Insurance companies like Old Mutual, Allianz and American Equity have created a three fold scam to legally bilk the elderly, cognitively impaired and financially unsophisticated out of large portions, if not all, of their life savings.
According to The New York Times, these insurance conglomerates start by sponsoring sales academies that teach insurance agents high pressure sales tactics. At seminars like the “Million Dollar Academy”, thousands of sales representatives are advised to scare retirees by saying, “I am all that stands between you and potential catastrophic loss.” Some seminars instruct agents to “drive a wedge” between retirees and their established advisers. These same academies bestow dubious credentials to agents upon completion of the course. Lofty titles like “certified elder planning specialist,” “registered financial gerontologist,” “certified retirement financial adviser” and “certified senior adviser” are designed to a engender trust and confidence from otherwise suspicious elderly investors.
Many insurance agents get high commissions from selling elderly clients complicated investments that economists say most retirees should never own. Since many agents are 3rd party, independent representatives, insurance companies can claim ignorance when unethical practices are employed by these agents. The companies are free to encourage questionable sales tactics by their representatives, yet remain insulated from accusations of financial elder abuse. Minnesota attorney general, Lori Swanson says, “The insurers are happy to turn a blind eye to what salesmen are doing, as long as they make a sale.”
The second step of this scam is to create special annuities that allow assets to be legally hidden so that they appeal to elderly people with special needs who want to qualify for badly needed government assistance. Older people often become mentally and physically impaired and require assistance with the needs of daily living. In-home care, assisted living facilities and nursing homes are expensive. Many elderly are on a fixed income and panic at the thought of being a financial burden on their families or running out of money. If they put the majority of their assets in a qualified annuity, an elderly person can get financial assistance from the government to help pay for the care they need. Seniors who are already experiencing mental decline and are under this type of mental duress may be further pressured by aggressive insurance sales reps. They may not have the presence of mind to investigate, research and truly understand what they are being sold.
The mechanics of these annuities may not be fully disclosed by the people that sell them. In fact, the salespeople may not even understand important details of the policy. For example: Old Mutual annuity contracts do not mention what the expected return on investment (ROI) is. Or what “commuted value” formula they will use if the policyholder should pass away. The commuted value is the lump sum that beneficiaries may expect to receive. While the policyholder may have intended for his or her family to receive a large lump sum remainder upon their demise, the insurance company may offer a significantly smaller amount. Surviving beneficiaries may be offered only 70 percent or less of the remaining value. The insurance company makes an immediate 30 percent or more gain and survivors have no choice but to accept this and along with losing a loved one, also lose out on their rightful inheritance. Don’t expect your sales representative to volunteer this information.
Your sales agent may not mention what commuted value means, what the specific formula is or that up to a certain amount, regular inheritance may not be taxed but inheritance from an annuity is fully taxable. According to The Hayes Law Firm, “During the sales pitch, a broker or financial planner will emphasize the “protection” that the death benefit gives the customer’s heirs, while de-emphasizing potential drawbacks.”
“Your heirs will owe income taxes if they inherit an annuity. Annuities, unlike most other investments, don’t get a favorable tax treatment known as a “step up” in basis when you die. While most other investments get favorable tax treatment, withdrawals from an annuity are taxed at regular income-tax rates.”
The final part of this boondoggle is that while these tactics may be unethical, they are NOT illegal. Insurance companies have carefully protected themselves from prosecution and legal consequences. Even if a cognitively impaired senior signs on to invest their life savings in these annuities, there may be little recourse. Most annuities are irrevocable, meaning they cannot be canceled and the money is effectively locked up for the duration of the term. In California, there are no laws governing limits as to what amount the insurance company may offer as commuted value and anything promised by a sales agent is simply hearsay unless it is also specifically written in the contract.
The North American Securities Administrators Association, an association of state regulators, reports that over one-third of all cases of financial exploitation of the elderly involve annuities. According to The California Department Of Insurance, many elderly individuals have been taken advantage of by insurance agents who have manipulated them into purchasing an unsuitable annuity or replacing existing or established annuities with a new one simply for the agent’s financial gain.
To protect yourself and your loved ones, have an independent elder law attorney and/or financial lawyer carefully review all documents before signing. Check with your states’ Insurance Department to see how many complaints have been filed against the insurance company you are considering. Make sure the contract clearly states what the commuted value formula is, what the return on investment is and how payments are to be distributed.