Indexed Annuities are Particularly Bad Investments for Senior Citizens


Sales of indexed annuities to seniors is a form of senior financial abuse. That is what experts are saying about the product that is being aggressively and successfully marketed to seniors. See “Indexed annuities ‘terrible idea’ for seniors, says Wharton prof,” InvestmentNews, Jan. 24, 2011.

“These contracts have really high hidden fees,” Kent Smetters, a professor of insurance at the University of Pennsylvania’s Wharton School and a former U.S. Treasury Department economic policy official, was quoted as saying. “That’s why they’re terrible ideas for older people even though they’re peddled to them.” Complex terms and embedded fees make them unlikely to perform as well as expected, Smetters, added.

Indexed annuities are enjoying record sales. Allianz SE and Aviva Plc sold $8.7 billion (a record) in the third quarter, an increase of 16% from last year, according to the article. Sales commissions as high as 12%, plus perks like free trips, help drive sales.

“The pure psychology of downside protection with upside potential sells really well,” Smetters was quoted as saying, adding: “These products are all very complicated. The problem is, they’re not transparent.”

One complicating factor that is not transparent is the use of derivatives, which are financial contracts, such as puts and calls. Salespeople often ignore or try to downplay the complexity of indexed annuities and their long lock-up periods, according to Barbara Roper, director of investor protection for the Consumer Federation of America, a Washington-based lobbying group. Indexed annuities “one of the most abusively sold products on the market today,” Roper was quoted as saying.

State regulators have sued or issued warnings about deceptive sales of indexed annuities. ??Last year, a federal jury found that Allianz Life Insurance Co. of North America, the nation’s top indexed annuity seller and a unit of Allianz Se, misrepresented one product by promising a 10% “bonus” to hundreds of thousands of buyers. The bonus was illusory and could not be cashed.

Some insurance companies have made a decision not to offer index annuities. Those companies include Met Life, Prudential, New York Life, and TIAA-CREF.
“Very few people understand what the product is,” said Dan Keady, director of financial planning for TIAA-CREF.

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