https://retirementplanningscottsdale.com/2018/09/27/anil-vazirani-explains-complex-proprietary-fixed-index-annuities/ Anil Vazirani explains COMPLEX PROPRIETARY FIXED INDEX ANNUITIES.
Seniors across Arizona and other states are being targeted by insurance agents with ads promising investments generating returns of up to 9% with no market risk. Insurance agents are marketing new, complex proprietary Fixed Index Annuity (FIA) products through newspapers advertisements using language designed to make these agents and their small insurance agencies indistinguishable from large regulated financial institutions. Seniors are falling victim to these deceptive advertising practices, and by the time they realize these proprietary FIAs are too good to be true, retirees are forced to make the Hobson’s choice of paying exorbitant early termination fees or risk waiting ten years with no return on their investments.
Seniors save their entire lives to live comfortably in retirement and cannot afford to see their savings locked up in investments that grossly underperform the returns promised to them by salesmen who are not subject to Arizona and other financial securities regulation but who are oftentimes giving investment advice without an investment license in violation of the Investment Company Act of 1940.
What are complex proprietary Fixed Index Annuities?
Marketed mostly to seniors, complex proprietary FIAs are investment products that offer full protection of the principal investment while promising minimum rates of interest over a fixed number of years. Advisers and insurance agents pitch FIAs as bank certificates of deposit on steroids with the security of being tied to a stock-market index while guaranteeing against losses if the market falls. While some traditional FIA’s (with strong guarantees) have their returns linked to traditional indexes (e.g. S&P 500), new, complex proprietary versions link to exotic indices with promises of unsupported, hypothetical returns with little or no track record. Despite using language that ties the complex proprietary FIA to the market, the Securities and Exchange Commission does not regulate or license Complex Proprietary FIAs. Rather, Complex proprietary FIAs are regulated by the Department of Insurance of each state.
Issues with complex proprietary Fixed Index Annuities:
Marketing materials for these new complex proprietary FIAs often show annual returns up to nine percent each year in personalized 10-20 page illustrations, but do not clearly explain that the performance is hypothetical using the benefit of hindsight and back testing. In reality, we have seen that after the 2-5 year strategy term, most pay zero percent. Often, complex proprietary FIAs restrict the potential for earning by setting caps on annual gains and/or excluding dividends from the calculation of payouts thereby limiting what consumers can earn even if the particular index performs extremely well.
These complex proprietary FIA contracts have several anti-consumer features that are not fully disclosed, including:
- the ability for insurers to adjust the participation in gains by increasing caps and spreads and by lowering participation rates which is not reflected in the 10-20 page illustrations giving to seniors;
- punitive early-withdrawal penalties within, on average, the first ten years which they become subject to when they realize the hypothetical returns they were shown in the beginning are not reality;
- hidden internal fees and other variables which diminish the value; and
- exotic indices showing hypothetical annual returns of 9% are being explained to seniors by insurance agents who are giving investment advice without an investment license.
Examples of how complex proprietary FIAs impacted Arizonans:
“In 2015, I purchased an indexed annuity from Nationwide Insurance where we were shown illustrations of nearly nine percent returns for 10 consecutive years. The product was called the Nationwide New Heights Index Annuity. I was not informed that our money would not receive any interest or gain for two years and I was not informed of the fees they could charge me on any future earned interest. The more I learned, the more I wanted to move our retirement money somewhere else. But to do so, I had to pay $20,372 in penalties to get out of them.” (Anthony Laurita – 74 years old)
“I was shown company brochures and an illustration explaining the Total Value Index that is a crediting strategy available on the Security Benefit Total Value Annuity. The performance numbers showed annual returns in the 7-10% range. I would not lose if the market went down, and I could see five year returns in the 30-50% range. I received 0% interest after waiting five years.” (Norm Mehlhorn – 76 years old)
“I am coming forward in hopes it will prevent other seniors and retirees from becoming victims of the index annuities. We were lured with a risk-free sales pitch about a high rate of return, but that’s not what we’ve ended up with. It’s the insurance companies and agents selling these inappropriate annuities who are being rewarded.” (Rick Brady – 65 years old)
How do we fix the problem?
The complexity of proprietary complex proprietary FIA contracts, the deceptive marketing techniques, and the fact these products are often based on exotic indexes make it imperative Arizona and other regulators act immediately. Regulators must protect seniors from the deceptive marketing practices employed by these new, complex proprietary FIAs. Iowa has enacted regulations prohibiting the sales of complex proprietary FIAs and the New Jersey Attorney General has fined individuals for marketing potentially inflated, misleading and confusing performance calculations.
Where do we go from here?
- Require that an index must have 10 years of actual performance history before it can be used and marketed on a fixed index annuity. Past performance is not indicative of future results but there must be real performance to help give transparency to seniors and retirees on expectations of the index being used.
- Advertisements for FIA’s from insurance companies and/or insurance agents must be approved and filed with each state department of insurance.
- Require insurance companies to include a copy of the original individualized illustration showing the specific hypothetical index performance that was used during the sale of the FIA in each annuity policy.
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