Annuity Alert

If you’re considering the purchase of an annuity, knowledge is your best weapon against deceptive sales practices.

What is an Annuity?

An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. If the payments are delayed to the future, you have a deferred annuity. If the payments start immediately, you have an immediate annuity. You buy the annuity either with a single payment or a series of payments called premiums. Annuities are never short-term investments, and should probably not be considered if a need for liquidity of funds is an issue, or may likely be an issue at some point in the future.

There are two basic types of annuities: fixed and variable. With a fixed annuity, the insurance company guarantees both the rate of return and the amount of payout. As its name implies, a variable annuity's rate of return can vary and is not guaranteed, but varies with the performance of an underlying investment option that you may choose. Because there is typically no guaranteed return associated with a variable annuity, an investment in a variable annuity carries with it a certain degree of risk, including the risk that you may lose your principal.

Equity Indexed Annuities

In recent years, sales of relatively new products known as “equity indexed annuities” have increased. Equity indexed annuities are a variation of a fixed annuity in which the interest rate is, in part, based on an outside market index, such as the S&P 500, for example. The annuity pays a base return in the form of a “minimum guarantee,” with the potential to earn a higher return if the index increases. The increase in sales of equity indexed annuities in recent years has been fueled by the marketing of these products as having a “guarantee” combined with a potential to earn a return linked to a stock market index.

Equity indexed annuities are classified and regulated as fixed annuity products. However, even though they’re classified as fixed annuities, equity indexed annuities can be much more complex, and in turn, much more difficult to understand than traditional fixed annuities. An investor’s return on an equity indexed annuity may be affected by a number of different factors, including index crediting methods, index participation rates, and cap rates. In addition, many equity indexed annuities also carry expense charges and surrender charges.

Before you buy an equity indexed annuity, you should understand the various features of these investments and be prepared to ask your insurance agent, broker, financial planner, or other financial professional a lot of questions about whether an equity indexed annuity is right for you. For more information on equity indexed annuities, visit the NASD or the NAIC websites and read about the features – whether beneficial or harmful – these products may have.

Are annuities appropriate investments for everyone?

No. Whether deferred or immediate, annuities are long-term contracts that typically restrict an investor’s ability to access his or her money. Deferred annuities may be unsuitable investments for many senior citizens because of this. A suitability analysis should be performed by your insurance agent or financial professional prior to purchasing any annuity. And, before deciding whether an annuity is right for you, ask your agent for a written comparative analysis between your current investment and the annuity you are considering to make certain it is to your financial benefit to make a change of investment.

Remember, an annuity is a long-term investment. Before you buy an annuity, you should understand the various features of the investment and be prepared to ask your insurance agent, broker, financial planner, or other financial professional questions about whether the annuity is right for you.

CFO Sink urges seniors to take the following precautions to avoid becoming a victim of financial scams:

• Assess your financial means and investment objectives prior to purchasing any investment.

• Ask the sales agent about the licenses and/or designations he or she holds, and what types of investment choices he or she can offer you.

• Don’t assume that every agent is always acting in your best interests. Ask about commissions, fees, penalties, surrender charges, and any other associated costs. Get the figures in writing prior to any sale.

• Always request a comparative analysis in writing between your in-force investment and any new investment.

• Before you surrender any in force investment to purchase a new product, call the company to find out if you will suffer a surrender charge, and if so, how much it will be. You may discover that the cost of a transfer outweighs any benefit of a new product.

• Don’t be swayed by free meals or other inducements.

• Beware of “bonus” interest rates, as they are usually limited in duration and have strings attached.

• Be cautious of sales pitches that claim you will “recoup” all penalties with the higher returns of a new policy.
• Ask questions and take notes. Walk away if an agent doesn’t answer your questions.

• Don’t let your guard down simply because an agent is a member of the same religious, ethnic, cultural, or professional group. Its only human nature to trust people with whom you have a common background, and religious or ethnic identity is a common source for affinity fraud.

• Take your time. High pressure sales tactics will rush you into an unwise decision. A sound investment will be just as good tomorrow or next week.

• Document all transactions.

• Never agree to make a check payable directly to an agent.

• Carefully read and understand all documents before you sign them. Don’t sign any blank or incomplete forms. Fraud is commonly committed when consumers are convinced to sign incomplete documents, only to discover that terms were later inserted without their authorization. Signing blank or incomplete forms is never in your best interest.

• Remember: if it sounds too good to be true, it probably is.

Consumers who believe they have been victimized should call the Department's Consumer Helpline at 1-800-342-2762 or log on to www.myfloridacfo.com to file a complaint.