In financial market, it’s buyer beware

Annuity fraud is on the rise as the multibillion-dollar annuity market grows.

Milwaukee Journal Sentinel

MILWAUKEE — On Jan. 23, 2006, insurance agent Jayne Doucette met with Joseph and Evelyn Filo, a retired couple in their 80s, in their home in Waukesha, Wis.

The Filos had invited Doucette over to discuss buying a prescription drug policy under the new Medicare law.

A few hours later, Doucette had parlayed that sales opportunity into persuading the Filos to buy about $70,000 worth of annuities from the Bankers Life and Casualty Co. of Chicago. That was more than 80 percent of their net worth, and to raise the money, the Filos would have to liquidate other investments, paying taxes or penalties in some cases, according to a file in the state office of the insurance commissioner.

The annuities would tie up the Filos’ money for several years and were “unsuitable in light of their financial circumstances,” Anne Debevoise Ostby, an administrative law judge in the commissioner’s office, wrote. Eventually, the Filos got their money back. Doucette lost her license and was ordered to pay a $15,000 forfeiture.

What happened to the Filos is becoming increasingly common as the multibillion-dollar annuity market expands, according to Sean Dilweg, Wisconsin’s insurance commissioner. Though annuities used correctly can be a helpful financial planning tool, too often they are being sold incorrectly to people who do not understand what they are buying.

To deal with such problems, Dilweg recently appointed a special committee of industry and government officials to make recommendations to better protect consumers in the state from “unsuitable sales and abusive sales and marketing practices.”

The market for annuities is huge. Sales of individual annuities in 2006 hit $236.2 billion. And complaints about how they are sold are rising.

Annuities are contracts with insurance companies, and there are many variations, but in general, they come in two types.

In one, clients invest a sum of money and in return are guaranteed a stream of periodic payments, sometimes for the rest of their lives.

In the other, the money is invested by the insurance company, with tax on the earnings deferred until withdrawn. Usually, withdrawals cannot begin for many years without a penalty.

More commonly, it is the second type that leads to the most abuses, according to Dilweg and others.

“Generally, I am going to recommend an annuity for someone if a person has a large amount of nonqualified money, is in a high tax bracket and would like to shelter some of that money” from taxes, said John Wheeler, an insurance agent with the John Patrick Planning Group in Green Bay, Wis., and a member of Dilweg’s committee.

“Nonqualified” money is in an account on which taxes on earnings are due, as contrasted with something like an individual retirement account, in which taxes are deferred.

A good candidate for an annuity would be someone with $200,000 in a checking account who will not need the money soon, Wheeler said.

Joseph Filo was not so liquid, but the 83-year-old retired salesman said he was impressed with the interest rate Doucette said would be paid on the Bankers Life annuity.

When she came to his apartment, “right off she started inquiring about our assets, she started telling us about this deal,” Filo said. “She came here and told us we could get 12 percent or 15 percent,” which was much more than the Filos were earning on other investments, including some annuities.

“It was greed,” Filo said, explaining why he agreed to Doucette’s proposal.

The annuity was indexed to the Standard Poor’s 500 average, and Doucette told them it would earn 12.65 percent. She took from the reading of the index at the time, 1,265.02. That was incorrect, and Doucette “did not have a reasonable basis to believe that the policies offered double-digit interest,” Judge Ostby wrote. The annuity’s return was based on the change in the S P Index, not its starting value. The annuities also had charges of as much as 10 percent for withdrawing money in the first 10 years.

On the application for the annuities, Doucette misreported Filo’s birthday, making it look like he was 78 rather than 81. The commission for sale of an annuity to a person of 78 was 4.25 percent vs. 2.75 percent for an older person, according to Judge Ostby’s findings.

Doucette also told the Filos that the annuity would protect their assets in case either needed to go into a nursing home.

“If you became a nursing home statistic, it was Medicaid friendly,” Doucette said in an interview. “It could not be taken.”

That is wrong, according to Timothy P. Crawford, a Racine, Wis., lawyer who specializes in Medicaid planning. Annuities that actually protect assets of nursing home residents “are very rare,” he said.

When it comes to annuity sales, “it really gets down to how well the agent understands the product and how well the agent understands the consumer,” said Dilweg, the Wisconsin insurance commissioner. “Never buy these products in a vacuum; you should always talk to your own attorney, your own financial adviser. Never listen to your agent per se.”