Beware of Annuity Surrender Program
If you didn’t see last week’s newsletter titled: IUL vs. 401(k) with Employer Match (I was WRONG (sort of))!, click on the following link to read:
https://strategicmp.net/iul-vs-401k-with-employer-match
If you missed my controversial newsletter title: Fee-Only Planners: the Good, the Bad, the Ugly, click on the following link to read:
https://strategicmp.net/fee-only-good-bad-ugly
I learned about the following annuity surrender program from Anil Vazirani who contacted me about a 70 year old client of his who he sold an annuity to less than 12 months ago and was in the process of surrendering the annuity to invest in this plan. The annuity, by the way, had an income rider on it that would have been lost.
How does this sound as a marketing pitch?
1) If you surrender your annuity, we (those selling the plan) will pay the surrender charge.
2) The money from the annuity will go into “guaranteed” instruments that will:
–Grow at 5%-7% depending on the size of the premium; Or
–Will generate a 5% income payment
The term of the investment is 5 years.
Clients who are in traditional deferred annuities are NOT getting anywhere near a 5-7% rate of return. So this would sound appealing to clients who do NOT understand the risks involved. Even clients in FIAs (Fixed Indexed Annuities) are not going to be generating a 5-7% rate of return (so again this investment might look like a better option).
What’s the problem? (It’s not illegal to surrender an annuity and invest in something else).
In this case, the senior client was under the impression that the returns were “guaranteed.”
Guess where the money was being invested?
The money goes into what is essentially a limited partnership where the money is invested primarily in life policies (life settlements) (like there haven’t been enough scams or problems with life settlement investments over the years).
Of course, a limited partnership investment is not guaranteed, but that’s the impression the client had after talking with the salesperson.
The limited partnership has Class A and B shares. The developers of this structure own the A shares and the client is given B shares.
B Shares can be called early (meaning the client might not get the rate of return or income stream for the entire period of time).
In the fine print of the marketing material….it is not guaranteed that there will always be enough assets that can be disposed of to cover all the sums owed to the Class B shareholder.
Who in their right mind would do this?
As I’ve already stated, the only reason I found out about this is because an advisor I know had a senior about to cash in a deferred annuity to invest in this madness.
Senior clients are vulnerable to those who want to take advantage of them. To the senior client it probably sounded good.
-The surrender charge is going to be covered.
-The “promised” rate of return is higher or even much higher than the annuity return.
The risk?
There is no doubt in my mind that most senior clients who are pitched this plan will have no idea of the risks involved.
Be on the lookout!
It’s important to always be on the lookout for nonsense like this that could be pitched/sold to your clients.
If you have schemes pitched to your clients that you think other advisors should be warned about, please forward them to me for review and possible publication. Doing so is an industry service that can’t be understated.
Roccy DeFrancesco, JD
269-216-9978
roccy@strategicmp.net
