Annuity Exchange / Swaps - A Sales Scam
30 August 2006There’s a great article over at CNN from Money Magazine for anyone thinking of buying an annuity. I’ve recommended buying annuities in some cases in the past, especially annuities designed to guarantee income past the age of 85. But the term “annuity” is associated with a lot of borderline fraud, because it is also used to refer to instruments that are a lot more complicated than the basic “you get this much money per year until you die” annuity. With complexity comes an easy way to scam consumers who don’t understand what they’re buying, especially for unscrupulous salesmen.
The CNN article highlights several kinds of annuities that are basically worthless to consumers, and I may come back to some of the others in a few days - but the one I want to highlight is the annuity swapping or switching scam. Here’s what happens:
Say you already have an annuity. A salesman - maybe the same one who sold the annuity to you - comes to you explaining that it’s outdated. Ah, but not to worry. He can exchange it for a new model that has better investment options and other up-to-date benefits. He might even throw in a bonus to sweeten the pot: an extra 1 percent to 5 percent of the amount you invest.
As enticing as this deal may sound, it’s almost always one you should pass on. The new and improved annuity will likely have higher annual charges, especially if it’s a bonus annuity. (The only way the insurer can afford to pay the bonus is to collect higher fees.)
Why does the salesman do this? Because a person who’s already bought an annuity is a ready-made customer. He already knows you’re interested. And with a swap, he can keep making sales to you every few years, over and over - he’ll just switch one annuity for another one that’s supposedly a lot better for you, collecting fees every time. This law firm web site explains some of the variants of the scam, and another law firm has a consumer alert here.
As the CNN article points out, you probably should only be getting annuities that give you set monthly payments. There’s no point in an individual owning something as complicated as the stuff some of these people are selling. And follow that old rule about eggs and baskets - several of the people profiled in the article got into trouble mainly because they put gigantic chunks of their retirement savings into a single annuity, often without really researching it.
Discuss this in the Free the Drones Investment Forums.
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