As a result of the 2008 financial crisis, many investors find themselves in the vulnerable position of being in a hurry to replace lost income and diminished net worth. There may be a temptation to take on inappropriate risk in hopes of higher or “guaranteed” returns.
During “season,” we regularly receive invitations for “free” meals at some of our area’s finest restaurants and country clubs. With proper planning, one could probably eat out every day of the week by attending these workshops and seminars. But Mom always said there’s no such thing as a free lunch, so be wary of the promise of high returns with little risk and presentations focused on product sales pitches, rather than investor education.
One investment product that is often the subject at these “free” meal seminars is the annuity. Annuities come in many shapes and sizes. The problem isn’t necessarily annuities, but the way they are sold.
An annuity is an insurance product. You make a lump sum payment or series of payments, and the money grows, tax-deferred, at a fixed or variable rate (the accumulation phase). In return, the insurer agrees to make periodic payments to you for the rest of your life (the payout, or annuitization phase). Annuities also have a death benefit (this is where the insurance comes in) that entitles your beneficiary to the value of your annuity or a guaranteed minimum, whichever is greater.
According to the State of Florida, age 65 qualifies someone as a senior, and there are more than 2.9 million seniors in Florida. This number is projected to grow by as much as 30 percent. Many of these seniors are targets for fraudulent annuity practices.
Alex Sink is the state of Florida’s Chief Financial Officer (CFO). She created the Safeguard our Seniors (SOS) Task Force to review and recommend solutions to better protect Florida seniors against financial fraud.
Jan. 1, 2010 marked the beginning of tougher penalties for agents who use predatory practices when selling annuities in Florida. New legislation clarifies and strengthens suitability requirements that agents must meet when selling an annuity to a consumer.
The first time I met Alex Sink, I was impressed with her fair-minded no-nonsense attitude. She was presenting at a meeting on the merger between NationsBank and Bank of America in October 1998. Here’s a bit of trivia for you: Bank of America was actually acquired by Nations Bank. The structure of the deal called for NationsBank to be renamed as Bank of America, N.A., and at the time, it was the largest bank acquisition in history.
A quick history lesson; during late 1998, financial markets were responding to Russian and Asian financial difficulties. Commodity and stock prices were falling worldwide and the International Monetary Fund (IMF) had stepped in with a $40 billion stabilization policy. As they say, history may not repeat itself, but it often rhymes, and if we don’t learn from the past – well you know the rest!
In her role as CFO of the state of Florida, Sink’s sound character traits remain the same. According to her Web site, the office receives literally thousands of calls and complaints from consumers regarding financial fraud. Predators target seniors and may try to convince them to liquidate existing annuities, CDs, stocks and savings accounts to fund new annuities.
Be skeptical and cautious of any claims made at a free-lunch seminar. Ask specifically about annuity surrender charges and fees. Take notes and ask for a written summary of everything you discuss with the salesperson. An annuity is a contract with an insurance agency; read it and understand it fully before signing.
The state of Florida requires a determination to be made about the suitability of an annuity when selling to an individual age 65 or older (seniors). The law also requires certain disclosures and an objective comparison of annuity contracts when recommending the exchange or replacement of a senior’s annuity. “This legislation represents a good first step,” said Sink. “And I’m not going to rest until we’re able to put unscrupulous agents that prey on our seniors behind bars.”
Are annuities right for you? The answer is, “It depends.” Annuities are a long-term investment that may be a sound investment for some, but not for others. Know what to watch out for and you’ll be better able to understand whether an annuity is the right investment for you. But most of all, don’t let anyone scare or pressure you into something, and never put all your eggs in one basket. One size doesn’t fit all. Be skeptical of claims made and don’t hesitate to get a second opinion or call the state with questions.
This is the necessary disclosure you should receive whenever annuities are discussed: Investors should consider the investment objectives, risks and charges and expenses of variable annuities carefully before investing. The prospectus contains this and other important information. Prospectuses for both the variable annuity contract and the underlying funds are available from my office and should be read carefully before investing. Variable annuities, issued by insurance companies, are long-term investment alternatives, designed for retirement purposes.
The selection of protection features may result in higher variable annuity charges, such as higher mortality and expense charges, or higher surrender charges and longer surrender periods. Guarantees are subject to the claims-paying ability of the issuer. Withdrawals of taxable amounts are subject to income tax and, if made prior to age 59, may be subject to a 10 percent federal tax penalty. An investment in variable annuities involves risks, including possible loss of principal. The contract, when redeemed, may be worth more or less than the original investment. Annuities are not FDIC insured.
Darcie Guerin, financial advisor and branch manager, Raymond James & Associates, Inc. 606 Bald Eagle Drive, Suite 401, Marco Island, FL 34145, provides this article. Gulfshore Life magazine named Guerin as one of the Best Personal Wealth Managers in the Southwest Florida area for 2009. If you have questions, e-mail her at Darcie.Guerin@RaymondJames.com or call 389-1041, toll free (866) 343-0882 or visit RaymondJames.com/Darcie. Past performance may not be indicative of future results.