Tom, a senior financial advisor, had been calling and talking to Henry for a while over the past few weeks. Henry's wife died last year, and he was getting worried about his retirement income. So, when Tom invited him to a free lunch investment seminar, Henry agreed to go. He expected to get good advice from someone who knew him and understood his situation. Even if he didn't invest any money, he would still get a free lunch out of the deal. At the seminar, Tom talked about various investments, but he focused on annuities, including the advantage of tax-deferred compounding until withdrawn. Given what the financial advisor said, Henry thought the annuity being offered sounded like a good deal for him, but for some reason, he felt uneasy. What was Tom hiding from Henry?
An annuity is a contract between you and an insurance company that is frequently used for retirement planning. In return for your premium payments, the insurance company agrees to provide either a regular stream of income or a lump-sum payment in the future. Generally, annuities are considered good investing strategies for long-term needs. But, they can fall short and even become harmful if the investor and the person selling the annuity do not take into account how appropriate the product is for the investor.
Any investment comes with risks. Unfortunately, some agents, brokers, financial planners and others who market annuities overstate annuity advantages and do not make sure the product is right for the buyer. They may use titles such as "senior financial advisor" or "certified senior advisor," but they actually may be no more than a regular insurance salesperson who has no special expertise on issues faced by older investors. Annuities are complex products with risks and penalties for early withdrawal. If the company fails, your assets could be frozen. Any monetary withdrawal from an annuity may be subject to taxes and a 10 percent federal penalty if taken prior to age 59½. If you should need to withdraw your money in case of an emergency, you could face a substantial penalty.
At the lunch seminar, Henry told Tom that he needed more time to fully understand the offer and wanted to have his daughter look it over. Tom turned up the pressure and told Henry that this was a limited time offer and that if he didn't act now, he would most certainly pay more later. For Henry, the warning bell went off when Tom asked him to sign a blank form and said that they could get together later to "work on the details." Henry thanked Tom for the free lunch and left without signing anything.
Tom's behavior is an example of misleading or even predatory sales practices. The Ohio Department of Insurance is working to end such practices and ensure that sales agents appropriately consider the consumer's needs and financial objectives when selling an annuity. New rules established by the department require insurers to make sure their agents receive the necessary training and supervision to match the investment product to the consumer's situation. Before an agent can recommend an annuity to a consumer, he or she must make a reasonable effort to obtain specific suitability information, such as:
- The consumer's age, annual income and financial situation and need;
The financial resources being used to fund the annuity;
- The individual's financial experience, objectives and time horizon;
- The intended use of the annuity;
- The investor's existing assets, liquidity needs and liquid net worth; and
- The buyer's risk tolerance and tax status.
If you suspect someone is engaging in deceptive sales practices, contact the Ohio Department of Insurance at 1-800-686-1527 with detailed information about the agent and product. Visit the department's website, www.insurance.ohio.gov, to learn more about annuities and the new rules.
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