With high commissions to sellers and many limitations to buyers, variable rate annuities are sometimes at the center of what we call annuity fraud. Annuity fraud takes many forms but it always causes problems to its victims. Agents are required by law and strict regulations to deal fairly with those to whom they sell annuities, and failure to do so may amount to fraud. Targets of such abuse may have legal recourse.
Perhaps the most commonly perpetrated annuity fraud is simple misrepresentation, which involves a selling agent who materially misrepresents or fails to disclose key features about the annuity. Those who are ill informed about the full nature of an annuity are in no position to invest in the product, yet this happens with great frequency, particularly within the senior population. When selling an annuity, agents must accurately convey its tax benefits and consequences, as well as the surrender charge. Failure to adequately inform buyers amounts to a dishonest assessment of the product, and agents can be held responsible for this behavior.
While misrepresentation encompasses all types of annuity fraud, one specific practice is by itself worth discussing. Churning is when a sales agent convinces a client to replace an existing variable rate annuity with a new one, even though the annuity has no clear advantage to the client. The agent may tout the new annuity’s benefits, without mentioning his expected commission or the buyer’s surrender charge for closing out the old annuity. All of this is motivated by personal gain and not the buyer’s interest, and agents should not get away with this.
Perhaps more than any other group, seniors are the targets of annuity fraud. This may be because the concept of a steady income is easily marketable to a demographic that is no longer in the work force. But what some of these seniors don’t realize is that variable rate annuities do not always provide a steady income. For instance, certain annuities are without a guaranteed rate of return, such that the annuity income may dwindle significantly if the underlying investments are unsuccessful. Further, seniors who are not fully informed of surrender penalties and other charges may mistakenly believe that they will retain access to annuitized funds, which is not the case. And, to make matters worse, it is not entirely uncommon for sales agents to visit assisted living facilities and retirement communities to pitch these products, regardless of their disadvantages to seniors.