Recently, I received a call from my office telling me one of my clients put in sell orders and it looked like he was transferring all of his money out. This is not any ordinary client. He is a special client we’ll call Fred. He has been with me since the 90s. His late father and elderly mother first invested with me in 1982. I was new to the business and they took a chance on me and have been happy clients since. So this came as a shock.
When I called Fred, he told me some men did a talk at their local library about annuities. He said they guaranteed him he could only make money and never lose. Really, how much will you make, Fred? I’ll make 8% the first year and 6% every year after. I then asked, How Long are the Surrender Charges? Fred replied, 2 Years.
So, Fred, you’re going to earn 8% interest the first year and 6% every year after and if you take your money out after 2 years, you’ll pay no surrender charges. Is that right? Right, Fred exclaimed! Fred, did they give you any papers describing the annuity? No, they just gave me a brochure about them. What Insurance Company is this with, Fred? I didn’t know of any Insurance Company. You think this is an Annuity, Tom? Yup.
SOME SHADY THINGS ARE GOING ON.
- Indiana Law requires insurance agents to leave a Product Description and an Annuity Buyer’s Guide. So do most other states. I confirmed this with our State Insurance Commissioner. Neither was left with Fred.
- No financial plan was completed for Fred. He has no idea how this product will work for him throughout his retirement
- Fred does not know which insurance company his money will be invested.
- These interest rates Fred believes are far above what the market can bear.
Fred has called the agent and is still waiting for what is due him. Fred then said something a bit disturbing. “Tom, these guys wouldn’t just lie to me. Would they? I just can’t imagine that”.
Fred may just not understand what was sold to him. No, Fred definitely does not understand what was sold to him. Fred is the first to admit he is not a sophisticated financial person. Most people aren’t and I think many in Fred’s shoes would love the idea. No Risk and 8%! WOW! Sign me up. And that is how this story goes, many times every day.
The Commissioner’s Annuity Specialist advised me what should be done when the Insurance Agent does not comply with the Law. First, you should have the client call the agent to make it right. If the agent refuses or does not comply, the client will need to file a complaint with the Department of Insurance.
WHAT CAN FRED DO?
First off, we will work to get that product description. Fred needs to know exactly what this is BEFORE he invests any money. If the agent does not comply, Fred should be able to find out what insurance companies are involved from the agent. We would then contact the company to get a handle on what product was presented and have them email us a Product Description. If the agent refuses to divulge the name of the insurance company, Fred could file a complaint with the State Department of Insurance.
The money has not yet transferred. If it had transferred, Fred has a 10 day Free Look Period. This means Fred can get a full refund up to 10 days after he receives the contract. If Fred wanted his money 1 day after the Free Look Period, he could expect to lose up to 15% of his money.
As you surely know, today, there are no Guaranteed Annuities paying 8% interest the first year and 6% forever. The best description of these popular Index Annuities I’ve heard is “Complicated Products sold to Unsophisticated People”.
THINGS TO REMEMBER AND REALLY RETAIN
- As of this writing, the Ten Year Treasury Note is yielding a little over 2%.
- An excellent rated insurance company with a guaranteed 10 Year Annuity should earn a little over 3% compound annual interest.
- Know Financial Credentials-CFP®, ChFC®, CLU® are gold standards. Financial Expert, Income Specialist, Financial Advisor/Consultant and Financial Planner are self-imposed titles and not Credentials; CSA is a Senior Advisor designation with limited financial education.
- There’s No Free Lunch.
- If it’s too good to be true, quit trying to believe it.