Seniors Scared Into Deferred Annuities

Pittsburgh, PAOne the surface, they may seem like good investments: annuities can provide a stream of income for people in their retirement years. However, there are often a number of factors that complicate annuity plans, making them unsuitable for certain investors. Selling annuities to those investors could constitute annuity fraud.

One of the main groups who often are unsuitable to purchase annuities, especially deferred annuities, is senior citizens. The reasons for this are simple. First, deferred annuities do not begin paying out to the investor until after the money is locked in for a certain time period—sometimes 15 to 20 years. For people in their later years, 15 years is a long time to have an investment locked in. And, with the money locked in, they cannot touch it without paying very high surrender fees, not to mention taking a tax hit at the same time.

Unfortunately, annuities often provide high commissions to financial advisors, which gives them a strong incentive to sell the annuities, even if it is to someone who is completely unsuitable for the investment.

A June 3, 2005, CBS News report investigated one woman's claim that she was inappropriately sold annuities by a financial advisor. The woman, Mary Lynch, was at the time eighty-seven years old and had purchased the investment when she was eighty-four. At the time, she put her entire life's savings, $65,000 in the annuity. What Lynch says she was not told, or did not understand, was that she would not receive payments from her annuity for 40 years—or when she would be 125 years old. She also did not understand that if she withdrew her money early, she would face stiff penalties.

Finally, she did not know that the man who sold her the annuity, who allegedly passed himself off as an "estate planner" was really an insurance salesman.

In other cases, seniors have been talked into turning over their other investments into deferred annuities. In such cases, they not only locked up their money, they often also paid high fees to withdraw their money early from those other investments. The seniors say they were scared into investing in the annuities by their financial advisors, who warned them that their original investments could be lost if they were ever subjected to a lawsuit or faced bankruptcy. The annuities were then marketed as being safe from such situations, even though in many cases any sort of lawsuit or bankruptcy was highly unlikely.

There have been many complaints from seniors that they were duped into purchasing annuities that were completely unsuitable investments. Some lawsuits have been filed by investors while others have been filed by states on behalf of the investors.