Denn Moves To Prevent Questionable Insurance Investment Sales To Seniors

Commissioner Also Provides List Of Questions Senior Citizens Should Ask When Considering Purchase Of Annuities

Dover – Cracking down on a practice that has been ranked as one of the top ten investment scams in the country, Insurance Commissioner Matt Denn on Wednesday proposed new safeguards for senior citizens who purchase annuities as investments from insurance companies.

An annuity is a contract in which an insurance company agrees to make a series of income payments at regular intervals in return for a premium or premiums that an investor has paid. Annuities are often bought for future retirement income.

“Nationally, variable annuities, which are annuities with a variable rate of return, have been widely abused by some unscrupulous companies and insurance agents—and much of that abuse has been directed at senior citizens,” Commissioner Denn said. “Many variable annuities charge extremely high commissions, management fees, and maintenance fees that are not clearly disclosed to the people purchasing them.  Many of them also have extremely high penalties for withdrawing money from the annuity fund early, which can be disastrous for a senior citizen who becomes very ill.”

The North America Securities Administrators Associations (NASAA) lists variable annuities sales practices as one of the “Top 10 Scams, Schemes & Scandals” in America.

Under Commissioner Denn’s proposed regulation designed to protect senior citizens from purchasing annuities that are not appropriate investments for them:

§         Insurance agents and brokers and insurance companies will be required to make reasonable efforts to find out from seniors what their financial status, tax status, and investment objectives are before recommending the purchase of an annuity;

§         Once the insurance agent or broker or insurance company has the information from the senior citizen, the agent or company cannot recommend the purchase of an annuity without having reasonable grounds to believe that the annuity is suitable for the senior citizen; and

§         Insurance agents, brokers, and companies will be required to have written procedures and regular audits to make sure that seniors are being asked for the appropriate information before being sold an annuity and that information is being used in an appropriate fashion.

“Once this regulation is in place, I intend to vigorously enforce it.  We will regularly check our insurance companies and insurance agents and brokers to ensure that they have the senior protection systems in place that the regulation requires,” Commissioner Denn said. “On my watch, I am going to do everything within my power to make sure that no one takes advantage of our seniors.”

A public hearing on the proposed regulation will be held Nov. 29. If approved, the regulation will go into effect January 11, 2006.

Commissioner Denn on Wednesday also released a list of tips for seniors considering the purchase of annuities:

§         Make sure that you understand all of the fees that are involved.  These fees can include surrender charges for early withdrawal of your funds, mortality and expense risk charges for those funds that offer guaranteed payouts, administrative fees for record-keeping and other overhead expenses, and charges for any special features that you may select.

§         Make sure that you understand the tax penalties that may be assessed—on top of any early surrender charges—against investors that withdraw before reaching the age of 60.  Make sure that you also understand the tax benefits that annuities offer—although their earnings accrue on a tax-deferred basis, they do not provide all the tax advantages of a 401(k) plan.

§         The National Association of Securities Dealers recommends that you ask the following questions of anyone trying to sell you an annuity:

§         How long will my money be tied up?

§         Are there surrender charges or other penalties if I withdraw funds from the investment earlier than I anticipated?

§         Will you be paid a commission or any type of compensation for selling the variable annuity?  If so, how much?

§         What are the risks that my investment could decline in value?

§         What are all the fees and expenses? 

§         Finally, be sure to ask yourself the following questions before buying an annuity:

§         Am I already contributing the maximum amount to my 401(k) plan and other tax-deferred retirement plans?

§         Do I have a long-term investment objective?  Am I going to need the money before the surrender period ends?

§         Do I understand how the variable annuity works, the benefits it provides, and charges I have to pay?

§         Have I read and understood the prospectus?

§         Are there special features provided such as long-term care insurance that I don’t need?

§         If I am buying a variable annuity, have I shopped around and compared the features of various variable annuities such as sales loads and other fees and expenses?

§         Do I understand the effect annuity payments could have on my tax status?

§         If I’m considering purchasing a variable annuity within an IRA, do I understand that IRAs already provide for tax-deferred savings?

§         Am I being pressured into making a quick purchase?

The tips and question are available online by going to Commissioner Denn’s website at www.state.de.us/inscom and clicking on “Annuities.”

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