Annuity Fraud


What is Annuity Fraud?

Annuity fraud takes place when the selling agent misrepresents facts when soliciting the purchase of an annuity or fails to properly disclose important facts about the investment. There are as many types of annuity fraud as there are types of annuities - and there are many different annuities. Although most of the recent abuse has involved variable annuities, other forms of annuities, such as fixed or indexed annuities, have also been the subject of abuse.

What is Going Wrong With the Sale of Annuities?

Regulators continue to focus a good deal of time and attention on the prevention and detection of inappropriate sales and marketing practices with respect to variable annuities and variable life insurance policies. Of foremost recent concern are the following: (1) unsuitable sales and switching; (2) failure to disclose critical information to customers; (3) market timing and late trading; (4) improper sales contests; and (5) the failure of some broker-dealers to maintain and enforce adequate written supervisory procedures which might prevent or detect abuses in each of the previously mentioned areas.

Who Commits Annuity Fraud?

Annuities can only be legally sold by licensed insurance agents or by stockbrokers who are also insurance agents. Whether you purchased an annuity from an insurance agent or from your broker, if the selling agent failed to deal fairly and honestly with you, you may have valuable legal rights that would permit you to cancel the purchase and, possibly, obtain an award of monetary damages.

Why Can Only Insurance Agents and Stockbrokers Sell Annuities?

Annuities are considered a form of insurance. Insurance can only be sold by agents licensed with the State Department of Insurance and with the company selling the annuity. If the money in the annuity is used to buy stocks as part of a fund, the annuity is viewed as a security and the agent must also be a licensed stockbroker under the direct supervision of a brokerage house. Both the insurance company and the brokerage house are fully liable for any fraud or misconduct perpetrated by the selling agent.

What is the Problem with Variable Annuities?

If you purchased an annuity from your stockbroker, you probably bought something that costs twice as much as a mutual fund and paid for benefits you don't need. A mutual fund pays 2-4% commission, but a variable annuity pays a 7-10% commission. The broker also gets a trailer fee over time without actively managing the money. More than one trillion dollars is currently invested in variable annuities nationally. Life Insurance companies and stockbrokers are making millions of dollars by selling investors something they don't need.

A study by researchers at York University in Canada and Goldman Sachs a few years ago suggested that the insurance fee that's embedded in variable annuities is way out of proportion with what it's worth. A typical life insurance charge is 1.25% (although it can run as high as 1.60%) which would work out to a cost of $312.50 per year for a $25,000 annuity. Using the study's conclusions, a fair and normal death benefit charge for $25,000 of life insurance would be a mere $5.00 annually for a female and $8.75 per year for a male.

In recent years, thousands of elderly investors got into trouble by investing in variable annuities. The annuity problem is exasperated by the high broker commissions annuities pay. Since they pay far more compensation, it is easy to see why stockbrokers use hard sell techniques with annuities, even when they are not appropriate investments.

Many elderly investors mistakenly believe that annuities are safe investments, but in many cases this is a misconception, since variable and equity-indexed annuities can be highly risky. Annuities have been particularly tempting for people looking for a fixed income from early retirement. Investors may believe that they are entitled to a set amount per year for life but, unhappily, many investors have belatedly discovered that this is not always the case.

Stockbrokers have been guilty of telling investors that annuities can go up in value if the stock market rises but are insured against losses if the stock market falls. What the broker leaves out is that the insured must die for the guarantee to ever pay off. The annuity is really nothing more than mutual funds combined with term insurance. If the stock market goes up, the mutual fund may rise somewhat, but the investor has paid substantial fees and the term insurance portion is worthless. If the stock market goes down, the mutual fund falls in value and the investor has lost money, plus has paid out substantial fees.

Annuities can be very risky, and are in some ways worse than stocks, because the investors are locked into the investments due to fees, structures, and tax consequences. Investors have to pay a surrender fee to withdraw their money, usually the amount of the commission.

What is Variable Annuity Fraud?

Variable annuities are insurance contracts providing purchasers with future payments that fluctuate according to the performance of mutual funds and other managed funds into which a customer's money is invested. Variable annuities are sold by insurance companies and brokerage companies for commissions. According to the New York Times and other publications, various state and federal regulators are investigating the trading practices of the variable annuity industry. Because Variable Annuities can be high-risk securities, the fraud laws governing the sale of mutual funds and stocks apply to their sale. Thus, the whole body of state and federal law governing securities fraud can be brought to bear against an agent guilty of using fraud to sell a variable annuity.

What are the Other Types of Variable Annuity Fraud?

Among the abusive and improper sales practices allegedly engaged in by sellers of variable annuities are the following:

  • Churning and Excessive Fees - The unnecessary replacement of old variable annuities with new ones to create unnecessary commission payments and surrender fees
  • False Disclosures - Failure to disclose investment risks or misrepresenting tax deferral benefits that can be achieved through variable annuity investments. Falsely touting variable annuity products of one company over identical products of another in order to generate commissions and surrender fees
  • Preferential and Unfair Customer Treatment - Side agreements between the seller and certain large or favored investors to allow "market-timing" and "after hours trading" in which favored customers are allowed to rapidly buy and sell variable annuities, harming long-term investors who are not allowed to participate in the practice by diluting the profits they would otherwise receive and concentrating or increasing their losses
  • Unsuitable Sales Into Tax-Deferred Accounts - The unsuitable investment or transfer of funds in tax-deferred accounts such as IRAs, Keoughs, Rollovers, 401(k)s, profit sharing, and other qualified retirement plans, subjecting such investors to higher and additional classes of fees, as well as unnecessary termination costs and restrictions, and lower overall investment returns
  • Inappropriate Recommendations - Stockbrokers must use due diligence and make sure that their recommendations are appropriate for their clients. The recommendation of a variable annuity that is not appropriate is improper and considered a form of fraud by the broker.
What Are the Legal Protections Available to Defrauded Annuity Investors?

In the case of fraud, the law permits the buyer to cancel the purchase and receive back all of the money that has been invested. Under certain circumstances, additional damages may be awarded. Importantly, the law provides special protections for elderly investors who have been the victim of fraud by an insurance agent or stockbroker, and elderly investors may be entitled to cancel the contract and receive a full refund plus three times the amount lost as treble damages, costs and attorneys' fees.

What Should You Do If You Think You May Have Been Defrauded?

If you purchased any type of annuity and believe that the selling agent misled you or if you think you may be the victim of fraud, you should consult an attorney immediately since there are strict time limits for legal action and, after these limits have passed, it is not possible to sue even if there has been fraud.

For over 22 years, The Law Offices of Timothy C. Karen has prosecuted legal claims in Court and in Arbitration for investors who have been victimized by various forms of investment fraud, misrepresentation, or manipulation. The firm has been involved in the prosecution of a wide range of class actions under federal securities and state corporate laws. Financial fraud is running at epidemic proportions in the current market, and a current problem affecting many Americans is the unlawful sales practices of some variable annuities companies.

The firm handles annuity fraud cases on a contingency fee basis and does not charge for initial consultations. If you have questions about your annuity, please feel free to give us a call at 1-800-306-6010 or contact us online.

Additional Information About Annuity Fraud

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