Seniors Get a Hard Sell on Fee-Laden Annuities

Agents target the elderly's sizable assets, playing on their fears to push a product that may not meet their needs. Rich commissions drive tactics.

By Josh Friedman
Times Staff Writer

April 24, 2006

Maydeen Tharp wanted a living trust. She wound up buying a $230,000 annuity.

Tharp, a widowed homemaker, had invited an insurance man to her home in Upland to get her estate in order. The salesman shifted the conversation to a different subject: annuities. Then he asked whether they could move outside to the back patio, so her cats wouldn't trigger his allergies.

The salesman talked for hours. The November afternoon grew cold and dark.

Finally, Tharp gave in. She agreed to move the bulk of her retirement savings into an annuity.

"He was so talkative he could sell you anything," recalled Tharp, 69. "After five hours, I was so tired and cold, I just wanted to make him go away."

Tharp had second thoughts the next day and was able to get her money back with help from her financial advisor. Thousands of other elderly Americans have not been so fortunate.

Investment brokers and insurance agents are selling annuities to the nation's 36 million senior citizens at a furious clip, often through deceptive or high-pressure tactics. Annuity sales reached $217 billion last year — nearly triple the level of the early 1990s.

Using come-ons honed by marketing experts, unscrupulous agents play on seniors' fears by suggesting that stock mutual funds, even federally insured bank accounts, are too shaky to depend on. They depict annuities as a secure alternative without explaining the accompanying fees and restrictions.

Some sales agents offer estate-planning services or free financial workshops for seniors to gain access to their financial information. Then they zero in on those with sizable assets, delivering a hard sell for annuities regardless of whether they meet the clients' needs.

Annuities are contracts that promise fixed or variable payments in the future. Salespeople sometimes omit mention of the "surrender" charges that apply if buyers withdraw more than modest sums in the early years of an annuity.

Murray H. Cheves, a 90-year-old retiree from San Luis Obispo, bought a $100,000 annuity in 2001 with exit penalties that lasted 10 years. Cheves would have had to live to 100 to have unfettered access to his money.

Instead, he died at 91, and his heirs were slapped with an $11,000 surrender charge.

"Our older citizens, understandably concerned with rising living and medical costs and even pension uncertainties, are being targeted by unscrupulous financial predators," said William F. Galvin, Massachusetts' top securities regulator, who has brought a string of complaints against annuity providers.

The NASD, the brokerage industry's regulatory arm, has filed 286 enforcement actions over annuity sales in the last six years — including 88 in the 12 months that ended in November, the most ever for a single year.

In a case settled last year, the NASD accused Waddell & Reed, a Kansas-based brokerage with offices across the country, of prodding thousands of clients to transfer their annuities from one insurance company to another. The reason: The new insurer had agreed to give the brokerage a bigger cut of revenue, according to the complaint.

Waddell & Reed urged sales agents to disparage the original insurer, questioning its financial strength and its commitment to customer service, said the NASD, formerly the National Assn. of Securities Dealers.

Customers switched 6,700 annuities to the new provider, generating $37 million in commissions for Waddell & Reed and its brokers. Investors, meanwhile, paid $10 million in early-withdrawal penalties.

Waddell & Reed paid $16 million to settle the case, along with $3 million to resolve similar suits brought by authorities in seven states. Two of the firm's executives were fined and suspended as part of the settlement. The brokerage, which neither admitted nor denied wrongdoing, declined to comment.

In California, state authorities and irate investors have accused subsidiaries of AmerUs Group Co., an insurer based in Des Moines, of using scripted pitches to frighten seniors into moving their savings into annuities.

A sales trainer, testifying in one lawsuit, said agents were coached to bad-mouth the Federal Deposit Insurance Corp., which insures bank deposits, by saying that the agency "had troubles" in the early 1990s and could take as long as 20 years to repay customers if a bank failed.

To avoid leaving a written record of these tactics, the trainers used a chalkboard rather than handouts, said Rob Gianelli, a Los Angeles attorney for the plaintiffs.

In a recent settlement of that suit, an AmerUs subsidiary agreed, among other things, to reimburse seniors for fees they incurred by switching annuities. Settlement talks are continuing with the state, which is seeking more than $110 million in fines and restitution.

Guaranteed Income

Regulators say deceptive practices are driven by the prospect of rich commissions. On a $100,000 annuity, the agent's take typically runs $3,000 to $10,000, although it can reach $16,000, according to industry experts.

"In many cases, the agent or broker ignores the senior's circumstances and locks him into an inappropriate annuity, and fat commissions are the motivation," said California Insurance Commissioner John Garamendi.

Annuities allow people to shield retirement savings from taxes for years and then receive regular payments, much like a pension. When investors die, their estates generally can get lump sums equal to at least what they contributed.

Surrender charges, however, can be in force for up to 20 years. During that period, investors who take out more than 10% of their money in any year can be subject to steep penalties. In addition, investment gains are diminished by commissions paid to sales agents and by fees for insurance features.

Proponents of annuities say abusive sales practices are far less widespread than regulators contend. They say their products make sense for many older Americans.

"The people who are doing right in this industry are not greedy with their earnings, and the great majority of us don't buy mansions and Jaguars at the expense of seniors," said Mark Kennedy, a Woodland Hills financial advisor who is a member of the insurance industry's Million Dollar Round Table of top sales producers.

Los Angeles billionaire Eli Broad, who founded SunAmerica Inc., one of the nation's biggest annuity providers, notes that the products are unique among investments because they can provide guaranteed income for life.

"People are living how many years now? If they start investing at 65, they need a variable annuity more than they need a mutual fund," said Broad, 72. "They need a guarantee that if something bad happens to the stock market, they or their heirs will get their money back."

But Broad conceded that people of advanced age should be leery of annuities. An 85-year-old, for example, might see only a few months of payouts — and withdrawing money early for medical care or other emergencies could trigger penalties.

Rita Steinberg was 78 when a salesman for Family First Advanced Estate Planning, an AmerUs subsidiary, prepared a living trust for her in May 2000.

A month later, the salesman returned to Steinberg's San Jose apartment and sold her a $156,000 annuity, according to a suit filed by her son, Stephen, a software engineer.

That August, another Family First agent sold her a second annuity for $200,000. A year later, Stephen Steinberg was visiting his mother when three Family First agents arrived to update her trust.

Steinberg, 53, said his mother treated the trio "like family," even inviting the female agent to stay with her. Steinberg said the agents had ingratiated themselves by giving his mother gifts including a teddy bear and a small safe.

A few months later, Rita Steinberg spent the last of her savings — $89,000 — on yet another annuity from Family First.

Her entire nest egg, more than $400,000, was now tied up in long-term annuities. Then her health declined and she moved into an assisted living facility. Strapped for money, she cashed in one of the policies, incurring a $31,000 penalty.

Her son has sued Family First and the annuity issuer, American Investors Life Insurance Co., also an AmerUs subsidiary.

"My mother and other seniors continue to be charmed and deceived," Steinberg said.

An AmerUs Group spokesman, Marty Ketelaar, said the company had "strong defenses" against the suit but declined to comment further.

Feeling Pressured

Hazel Hauswedell, 73, said the man who sold her two annuities was plenty charming — at first.

Hauswedell, a retired sales manager for a music store, said she met Barry Baricza in December 1999 while waiting for her Ford Taurus to be serviced at a repair shop.

Baricza dropped by her trailer home near Palm Springs. He treated her to lunch. When she talked about the difficulty of living on a fixed income, he said he had the answer: an annuity that could grow in value and provide steady payouts.

Hauswedell, a widow whose husband had handled the family finances, put $70,000 of her savings into an annuity, according to a suit she filed against the agent and the insurer, Conseco Inc. When Baricza returned weeks later and urged her to buy another, she resisted.

"I decided, 'I don't better put all my eggs in one basket,' " Hauswedell said. "He got very upset."

She said Baricza picked up her phone, asked for the number of her bank and dialed it. When a bank employee answered, she said, he handed her the phone and she reluctantly ordered a $67,000 transfer to buy the second annuity.

Hauswedell said she felt pressured to make the investment and did not understand its restrictions, including penalties of up to 20% for early withdrawals. She received no immediate income from the annuity and later had to draw down her principal to make ends meet, she said.

Conseco, based in Carmel, Ind., and Baricza denied the allegations before reaching settlements with Hauswedell last year. Baricza said the agreement barred him from discussing the matter.

Hauswedell, who now lives in Bakersfield, described her dealings with Baricza in interviews conducted before she entered into the settlement.

"I thought he was my friend and he was advising me right," she said. "I found out later he was just in it for the commissions."

A $50,000 Exit Fee

Nancy Clark was 83 when she bought a $125,000 annuity from National Western Life Insurance Co. in 2002. Her son, James, said she was in the early stages of dementia and mistakenly believed she would have access to all of her money if she had to enter a nursing home.

In fact, she would have to pay surrender fees of 25% if she took out more than 10% of her savings in any year during the first six years of the contract.

James Clark, a retired building inspector from San Bernardino, said his mother told him about the annuity not long after she purchased it. Clark said he was alarmed by the withdrawal charges and called the salesman, Ezra Chapman, to find out more.

The first conversation was "fairly mellow," said Clark, 58, who is suing Chapman and the insurance firm. But a follow-up call turned ugly.

"He became very irate on the phone, very vulgar, threatening, said I was crazy," Clark testified in a deposition.

By the time his mother died in 2004, the annuity had grown to $198,000. But Clark didn't get that amount; he had to pay a $50,000 surrender fee.

Garamendi's office recently joined the suit on behalf of California consumers, claiming a pattern of sales abuses by National Western.

Chapman's lawyer, Jim Williams, said his client "did not violate any law" and that there was no evidence Nancy Clark was mentally incompetent when she bought the annuity.

Kent Keller, an attorney for National Western, said James Clark could have avoided the surrender charge by taking the money over eight years instead of in a lump sum. He scoffed at the notion that elderly people are easily deceived.

"Mike Wallace is 87," Keller said. "Paul Newman is 80. Ruth Bader Ginsburg is 72. All these people seem to be fully functioning, thank you."

'Doing the Right Thing'

In retirement communities around the country, seniors with time on their hands, money in the bank and a soft spot for free meals are bombarded with sales pitches at breakfast, lunch and dinner.

Financial advisor Kevin McEnerney works Florida's Space Coast, talking up annuities over lunch at the Chart House restaurant in Melbourne.

One day last summer, he told a group of 20 seniors enjoying lunch at his expense about a "wonderful" annuity from AmerUs Group that paid interest tied to a stock market index.

"Annuities have gotten black eyes, but this is a good way to balance your money," McEnerney said. "It gives you a better return than a bank CD and yet it can grow."

Because the investor's principal is guaranteed, he added, the annuity provides a safety net: "If we're out there swinging for the fences with our retirement money and we strike out, what could happen?"

Before the salmon entrees were brought out, McEnerney invited attendees to visit his office for personal consultations.

"We treat our clients like family," he said. "If you don't like coffee and fresh-baked cookies, then our office is probably not a good place for you."

Dorothy "Dot" Eddy, 72, took him up on his offer after attending one of his Chart House seminars in 2004. Eddy put $156,000 in an annuity that provides monthly checks of $475 to supplement her Social Security income.

She said McEnerney persuaded her to purchase the annuity within her individual retirement account, playing up its tax advantages. But, she said, he didn't tell her she could get stung with surrender charges starting at 18% if she withdrew more than 10% of the principal in any of the first three years.

Eddy also said McEnerney failed to mention that the annuity's tax deferral was essentially worthless to her, because her savings already were protected from taxes in an IRA.

"I was very vulnerable and I got taken in," said Eddy, a retired middle manager for an electronics maker.

Eddy has sued AmerUs Group, alleging deceptive sales practices. Her lawyers are seeking class-action status on behalf of thousands of Florida seniors who bought similar AmerUs annuities.

AmerUs said it took Eddy's complaint seriously and would "work to resolve it as promptly as possible."

McEnerney, who is not a defendant in the suit, said that the annuity was a sound investment for Eddy and that he had explained its terms in detail.

"If I were one of those guys who doesn't follow the rules, I'd be scared, but this doesn't bother me," he said. "You have to look in your heart and know you're doing the right thing."

States with sizable elderly populations have adopted investor protections in recent years.

Florida requires agents to document the basis for any annuity sale to a senior, including a review of the client's financial goals and tax status. In addition, the Securities and Exchange Commission and the NASD are working with Florida regulators to ensure that brokers and financial advisors give truthful presentations at seminars for seniors.

Arizona gives annuity buyers age 65 or older a "free look" at the contract, allowing cancellations for any reason within 30 days.

A California law passed in 2004 mandates special training for annuity sellers who market to seniors and requires new disclosures. Before visiting a senior's home, for instance, agents must provide notice in 14-point type that a sales pitch is coming.

But even lawmakers who have taken on the industry say more needs to be done. State Sen. Jack Scott (D-Altadena), who wrote California's 2004 law, is pushing a bill that would force insurers to adopt "suitability standards" for all annuity sales to seniors.

Scott said he had heard complaints about dubious sales practices over the years, but a relative's experience drove home the problem.

His wife's uncle, a former BF Goodrich executive, was in his 90s and in declining mental health when he bought an annuity from a salesman who visited his Fort Worth nursing home.

Scott said his relative needed immediate access to his money, not a tax shelter or a stream of payments far into the future.

"This problem has literally cost seniors many millions of dollars," he said, "and they don't have the ability to recover."

Friedman reported from California and Florida. Times researchers Scott Wilson and John L. Jackson contributed to this report.

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