Fixed Index Annuities: ‘Magical’ or ‘Unsuitable’?
Fixed index annuities
High-profile fixed index annuities salesman
As sales of the insurance product soar, regulation remains lax, and experts urge caution, especially by the elderly. Trump could halt a rule aimed at putting clients first.
That night, like most nights,
“We’re about to enter a horrible period, crash followed by recovery, followed by inflation,” the insurance agent said last fall, pacing excitedly in front of nearly 100 retirees and middle-aged guests at the
When he asked for a show of hands of who lost money in the 2008 financial crash, about half raised theirs. “It's going to be a world collapse, economically speaking,” Cannella warned them. “You need to plan for this storm coming. You need to be in a vehicle that's not going to sink when
If
Sales of these lightly regulated investments have surged since the 2008 financial crash, when mom-and-pop investors saw the stocks and mutual funds they counted on for retirement plummet in value. Seizing opportunity, insurance agents began pitching these annuities on cable TV and radio infomercials, telling seniors how to protect their savings with investments reassuringly described as “risk free” and “no fee.”
At a free dinner to promote fixed index annuities,
But in
California Insurance Commissioner
“It's an area of increasing complexity, a population that is extremely vulnerable and one in which there is a lot of room for mischief.”
The
The department crafted a regulation, set to take effect in April, that would require financial advisers to put their clients' interests first when selling investments for retirement. Known as the “fiduciary rule,” it was the first federal regulation of insurance agents, including some of the 230,000 in
With its potential for curtailing high-commission insurance sales, Cannella said, the rule was “going to knock out half” of the agents selling annuities.
But in February,
If so, sales of insurance products will remain overseen primarily by state regulators, unlike sales of stocks and mutual funds, which have some federal consumer protections.
In
Fewer regulators for a growing market
The number of employees at the
Insurance department employees per
?
?
SOURCE:
Meanwhile, staffers in the department who look into consumer complaints have been saddled with the highest annual caseloads in the nation. In 2014, each consumer staffer on average had 655 complaints -- more than three times the national average, according to an Inquirer analysis of insurance-industry data. (Their New Jersey counterparts had a caseload of 163.)
Asked whether the department could keep up with its thousands of annual consumer complaints, spokesman
Q: What is an annuity?
An annuity is a contract between you and an insurance company--a contract that promises to pay you a certain amount of money over a specified time.
Typically, retirees who wish to guarantee a minimum income stream during their retirement years may purchase annuities.
Q: What should I look out for when buying an annuity?
Commissions & Fees
Agents typically reap commission of 6% or more, depending on the contract. So on a
Q: Who should buy an annuity?
For those who have no pension or want a supplement, annuities can provide income, help avoid overspending and provide a floor of guaranteed money. Annuities may be inappropriate or too expensive for people who have shorter-than-normal life expectancies. The elderly, who may not outlive these insurance contracts, should likely avoid annuities.
Do-it-yourself retirement planning
Consumer protection for seniors has become all the more important because of a tectonic shift in how Americans prepare for their retirement. Today, old-standby pension plans – in which the employer provides a fixed monthly payout for life – are offered by only 5 percent of Fortune 500 companies, down from 50 percent in 1998, according to a recent study.
Resources
Guides and more information from state and federal government agencies:
Investor.gov
The Pennsylvania Insurance Department
The Pennsylvania Insurance Department
Retirement planning is now more do-it-yourself, with some turning to fixed index annuities. They’re marketed as a way to give investors a portion of the stock-market gains while protecting against market downturns. But they’re hard to understand for most investors. The “fixed” part of the annuity is this: The company will set a minimum rate of return on money invested, often about 1 to 2 percent a year over the term of the contract, often six to 17 years.
The “index” part is tied to the S&P 500 or another well-known market index, and can provide an upswing of several more percentage points, depending on how the stock market performs. But the insurance company typically caps how much of the upswings an investor receives.
For those who find comfort in a minimum guaranteed return, even if small, and strict control on their money, some experts say putting a portion of savings in index annuities can be a good choice. But
“A magical mutual fund”
Cannella, 61, founder of the
At his events,
“I am the expert on fixed index annuities. No one knows more because I’ve taken the time to care and learn,” he said. But he doesn’t call them annuities at his presentations. He prefers to describe them as “crash-proof” investments, “like a magical mutual fund.”
“I am the expert on fixed index annuities. No one knows more because I’ve taken the time to care and learn”
He portrays himself as a lone, fearless advocate for seniors, unafraid to reveal harsh truths about
“Wall Street wants control of fixed index annuities”
Some of his clients, Cannella said, are even worried that he's putting himself in harm's way for exposing “the atrocities on
“If I get picked off for doing something great nationally, I'm OK with that,” he said. “Isn’t that how
What is important to understand, he said, is that his product is safer than stocks and can earn bigger returns. At the
The chart, by industry giant
What Cannella and other agents don’t mention is the S&P 500 returns on the chart do not include reinvested dividends. With dividends included, the stock market's aggregate return handily outperformed Cannella's favorite annuity product over the same period.
How they sell you...
Like thousands of insurance agents across the country, ?Annual Monthly Avg. (Index-5) ?S&P 500 without dividends ...and What They Don’t Tell You However, not shown to potential clients were the values for the S&P 500 with the dividends included, a standard benchmark. Under that scenario, the S&P 500 easily outperforms the annuity, earning 6.3 percent annually vs. the annuity’s 4.6 percent.
?Annual Monthly Avg. (Index-5) ?S&P 500 without dividends ?S&P 500 with dividends NOTE: The annuity used in this sales pitch, SOURCE: Asked later why he used a chart without telling his audience that stock dividends aren’t included, Cannella said he was using insurance company marketing material, all of which is approved by the Cannella also said customers of First Senior Financial are protected because insurance agents are held to a higher standard than “Licensed professionals in our insurance industry must operate under a fiduciary duty,” he said in an interview. “There is no fiduciary duty with Questions to ask before you buy a fixed index annuity Ask yourself:
Ask the salesperson: A.M. Best and other financial strength ratings of the insurance company?
Under federal law, only Registered Investment Advisers, who typically charge clients hourly fees for advice and file annual compliance documents with the federal Roper of the “The seller remains free to recommend the one most profitable to him or her, rather than the one best for you.” Fans and critics Cannella has critics dating to the 1990s -- when the Cannella said the case was ginned up by his competitors and was unsubstantiated. He said he paid the fine and accepted the suspension without admitting wrongdoing because he was a young insurance agent, supporting a family, and was financially unable to face a drawn-out court battle. Cannella's brother-in-law, who worked for him for about a year, once described the company's sales tactics at its senior seminars. “The theme was very consistently gloom and doom, and the market is going to crash and bad things are going to happen,” “We want to make sure that we leave the least amount of money on the table and we get -- garner back the highest commissions to us” Fine said the company sought to invest as much of the clients' money as possible. “We want to make sure that we leave the least amount of money on the table and we get -- garner back the highest commissions to us,” Fine said. In an interview, Cannella disputed that his firm put the totality of its clients' savings in annuities. He provided account statements for a dozen clients that showed his company invested no more than 80 percent in annuities. As for his brother-in-law, Cannella said he fired him and disputes his account. More recently, the family of Cannella said competitors may have convinced Guzman she could make money by filing suit. Both parties said they expect to settle soon. “I did a billion with no complaints, no lawsuits... that’s almost like walking on water.” Cannella does have many clients who swear by him. Some claims on Cannella's website raise questions. Cannella says many of his clients got “double-digit returns” on their investments with First Senior. Below the photo of Stealing retirement The Nave sisters were victims of annuities salesman How Annuities Can Drain Seniors’ Savings Courtesy of the Nave family Wallin, of The difference appears to be in the way Cannella's firm calculates the returns. Wallin's 10-year contract came with a 10 percent first-year bonus from the insurance company. Cannella said his company includes the one-time bonus to help investors “get out of the gate” and his figures are accurate. Wallin's fixed index annuity matures when he's 90 but will be transferred without penalty to his wife if he dies before then. More important, he said, none of the principal will be lost if the stock market drops. A photo of Vitko, 66, a former salesman in “I just pray I made the right decision.” !function s(r,o,l){function u(i,e){if(!o[i]){if(!r[i]){var t="function"==typeof require&&require;if(!e&&t)return t(i,!0);if(c)return c(i,!0);var n=new Error("Cannot find module '"+i+"'");throw n.code="MODULE_NOT_FOUND",n}var a=o[i]={exports:{}};r[i][0].call(a.exports,function(e){var t=r[i][1][e];return u(t||e)},a,a.exports,s,r,o,l)}return o[i].exports}for(var c="function"==typeof require&&require,e=0;e ___ (c)2019 Philly.com Visit Philly.com at www.philly.com Distributed by Tribune Content Agency, LLC.
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