“Dateline,” an NBC network show aired a program in mid-April titled “The Tricks of the Trade.” The show was an exposé on independent insurance agents selling equity index annuities to seniors. The show featured the combination of greedy insurance agents selling a product that while can be beneficial, can also be very damaging to the buyer. The targets of their sales were seniors. If you did not see the show, it can still be viewed on the Internet on MSNBC’s site. The show raises two very important questions, when is the product a quality solution, and who do you trust.
Equity Index Annuities (EIA) can be a viable solution. But as I have written before, there are many insurance companies offering products for sale by insurance agents and not all products are equal. This product can be complex with specific rules that must be followed. Products to avoid have long surrender periods, generally in excess of eight years and sometimes five years can be too long. Also, avoid products whose surrender fee stays high for a number of years prior to declining. Better products will have a surrender fee that declines most years. There are a few annuities requiring annuitization in order to surrender or close the account. These products should be avoided at all costs.
The EIA like all annuities has an inherent feature, you cannot lose money. This feature and the apparent promise to make an investment type return is the “pot of gold” less credible insurance agents are promoting to seniors. When this product is presented properly, two primary results occur. The senior is placing less then half, and sometimes less than a third of their financial resources in this or any other annuity thus leaving a significant portion of their assets available without penalties. The surrender fee schedule lasts less than eight years with the fee declining in most years.
The EIA is a product that crosses the line between pure insurance and investments. Since the EIA is based upon one or more indexes, generally the Dow Jones Industrial 30 or the Standard & Poor’s 500, knowledge of securities can be very beneficial in servicing this product. Thus far the insurance community has been able to permit the sale of these products with only an insurance license. This is primarily because the insurance business is governed by each state, rather than nationally. Thus, many insurance agents lack formal training in securities and as such, may lack the knowledge on how to service the EIA once sold. The Federal agency, FINRA (Financial Industry Regulatory Authority) has mandated agents that are also securities licensed to treat this product as though it is a security and present all sales for compliance overview to the agent’s broker/dealer. This is where the senior must be extremely careful. They can meet with an independent insurance agent and the agent can present annuities including the equity index annuity. If the agent is only insurance licensed, in most cases they do not have a compliance officer reviewing their transaction or the material they are presenting. While I am sure there are ethical insurance agents, this is where the senior can find themselves dealing with someone looking out for their own interests, commissions, rather than the financial security of the senior.
However, if the agent is also securities licensed, there is a high probability every EIA application is being reviewed for its appropriateness as a solution to the buyer. As the “Dateline” story indicated, many undesirable insurance agents use a variety of tools to give themselves credibility. All I can say is buyer beware. As a senior or son or daughter assisting your parents, seek an advisor who holds the CFP or ChFC credential. These are two very prominent credentials in the financial services industry and generally indicate the holder is reputable, and someone a senior can trust. You should also make sure the sales person hold both insurance and securities licenses.
While the “Dateline” story highlighted a true problem that seniors face, the story did little in pointing seniors in the right direction for assistance. Without the assistance of getting proper help, many seniors may choose to not do anything with their resources for fear of being taken or doing the wrong thing. If you are a senior or helping a parent or grandparent, contact the area Financial Planning Association (FPA) office for a referral to a CFP in your area. While I write this financial column weekly for the Blount Today, I also have an active practice servicing our community. In addition to my firm, there are several CFPs in our area qualified to assist seniors.
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Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member FINRA, SIPC.