A product sold to seniors may be bad for them
Like many people her age, Fern Wakulich, 84, needed to get more income out of her modest retirement savings. And, like many elderly widows, the Clearwater, Fla., resident was trusting. Far too trusting.
After hearing a financial advisor on the radio, she hired him to solve her economic problems.
But the advisor was more interested in his income than hers, according to Florida’s elected chief financial officer, Tom Gallagher. He recently revoked the agent’s license, citing Wakulich and dozens of other seniors as the reason.
The agent had put Wakulich’s money into an investment called an equity-indexed annuity that paid the advisor a sizable commission while locking up her principal for more than a decade.
Tales such as Wakulich’s are increasingly common, critics say. Equity-indexed annuities, sales of which have quadrupled in the last five years, can sound like a great deal, offering guaranteed minimum returns and the potential for more depending on how the stock market does.
But the devil is in the details. And for seniors, the devil is income -- or lack of it. Those who need access to their money before so-called surrender periods end get hit with huge financial penalties.
“For about four years now, we have seen a trend of seniors in their 70s and 80s, many elderly widows, who have been duped into putting the bulk of their retirement savings into equity-indexed annuities,” said John Hargrove, a Florida attorney who represented Wakulich. “The sad wake-up call that people receive is when they find out that they’re not going to get a check in the mail for 12 or 15 years. That’s when all hell breaks loose.”
Months after Wakulich bought her policy, she learned that the income she’d been promised wouldn’t be paid until after her 92nd birthday. She said she was never given the chance to read through the volume of paperwork that the broker had her sign.
Even if she had been able to read the legalese-filled disclosures, doing so may not have helped. The product -- technically an insurance policy -- is complicated enough to defy understanding, Hargrove said.
Although the annuities can make sense for younger people who are averse to risk, for older people looking for income there’s a huge catch.
The product accrues income based on a formula that’s tied to stock market returns. But the income that’s accrued cannot be paid out immediately. It must remain in the contract for a set period, usually five to 15 years.
If the policy is canceled early, the policyholder is hit with a “surrender fee.” In Wakulich’s case, that fee amounted to 25% of her principal.
Agents who sell the annuities often counter that as much as 10% of a policyholder’s principal can be withdrawn each year. That’s generally true. But, again, there’s a catch, Hargrove said. The amount withdrawn earns no income for that entire year, no matter how late it’s withdrawn, he said.
“One of the tricks of this product is a statement that you can get ‘easy access’ to your money,” he said. “But if you take that, you forfeit the income.”
The long surrender periods and stiff penalties for taking money out of an equity-indexed annuity are designed to allow the insurance company to recover the commissions it pays to the agent, Hargrove said. The policies commonly pay 9% to 15% of the principal amount to the agent who sells them -- a hefty incentive.
Frank Congemi, a New York based financial advisor, said he couldn’t think of a good reason to buy indexed annuities. Other products do the same thing they do, with far fewer restrictions, he said.
A senior wanting roughly the same income -- without the income lock-ups -- could buy a portfolio made up of 50% Treasury notes and 50% stock index funds, he suggested. Though such a portfolio, unlike equity-indexed annuities, would not guarantee a minimum return, it would tend to return about the same amount of income and price appreciation over time, based on historical performance data. It also would provide instant, penalty-free access to the investor’s principal.
“You can do it much cheaper, with much more transparency, than buying an indexed annuity,” he said.
In the last year, state securities regulators and the NASD (formerly the National Assn. of Securities Dealers) have issued numerous warnings about sales of equity-indexed annuities to seniors.
Several states, including California and Florida, have passed laws to increase the penalties for financial crimes against the elderly, including the sale of inappropriate products.
Still, problems persist. Seniors need to keep up their guard, experts say.
“Sadly, seniors are targeted by scam artists because of their access to a lifetime of savings,” Gallagher said when revoking the insurance license of Wakulich’s advisor. Like Wakulich, many victims are lured by offers of free “seminars” and through radio advertisements that are designed to sound like informational programming, Gallagher warned.
For Wakulich, the drama has a happy ending. Her lawsuit was settled last summer for undisclosed but favorable terms. She says she’s confident that she has enough retirement income to live on.
Once a regular at lunch and dinner meetings hosted by “financial experts” selling products, Wakulich now turns down those invitations. And she’s not hiring any more supposed experts from radio programs. When she buys an investment, she said, she makes sure she’s able to read all the disclosures before she signs.
“I have learned a lot since this happened,” Wakulich said. “It’s not going to happen again.”
Kathy M. Kristof welcomes your comments but regrets that she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For previous columns, visit latimes .com/kristof.
