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Dateline NBC Investigates Equity-Indexed Annuities

By JLP | April 15, 2008

Thanks to reader, “Pal,” for sending me this link.

I just watched Dateline NBC’s seven part undercover series on equity-indexed annuities. This is a must watch for everyone. It is pathetic the lengths that some people will go to to make a sale.

For instance, one of the video segments shows an annuity training program called “Annuity University.” At this training session, sales agents are able to purchase books that they did not write but can put their names on anyway to make it look like they are the book’s author. They can even purchase a magazine that will insert the agent’s picture along with a fake question-and-answer article with the agent inside the magazine. Even though this probably isn’t illegal, it sure as heck is misleading. It gives fake credibility to the agent. One of the agents actually pulled out a copy of the magazine and gave it to the prospect in one of the video segments.

Wouldn’t legitimately building credability by actually writing books and articles be the better way to go?

One other thing I thought was funny was one of the agents got really upset when he found out that he was being taped. He called the Dateline reporter a liar because he [the Dateline reporter] wasn’t upfront with the agent. The agent was probably just upset that he wasn’t going to make a sale. Funny stuff.

I also enjoyed the conversations with Joseph Borg, Director of the Alabama Securities Commission, and Minnesota Attorney General, Lori Swanson. Watch the videos and you’ll see what I mean.

I think this exposé should be watched by everyone—not so much to say that all annuities are bad—but rather to give people some things to think about BEFORE they sign on the dotted line of one of these contracts. I don’t think any ethical salesperson would object to that.

Related:

Another Follow-up on Equity-Indexed Annuities (Sorry Muddlehead)

My Response to a Comment on My Equity-Indexd Annuity Post

A Look at an Equity-Indexed Annuity

Do You Attend Retirement, Investment, or Annuity Seminars?

Think Before You Buy

Topics: Relationship Finance | 29 Comments »


29 Responses to “Dateline NBC Investigates Equity-Indexed Annuities”

  1. Esmond Says:
    April 15th, 2008 at 12:36 pm

    1) Understand what you are investing in.
    2) Salespeople mostly work on commission (unless specifically stated)
    3) Legitimately building credibility is a lot harder and more time-consuming than falsifying your credentials.

  2. Heidi Says:
    April 15th, 2008 at 2:02 pm

    Wow – like the new look, JLP.

    I am of mixed minds on this expose – annuities are often given a bad wrap, but sometimes they are a good solution (much like reverse mortgages).

    Personally, I would never recommend an equity-indexed annuity, but for someone with the right risk tolerance (or a lot of retirement savings to diverify), it might make sense.

    It’s unfortunate that there are so many shady agents, advisors, and broker/dealers out there – it makes it harder for ethical, legit advisors to position products that really can help people who need a dependable income stream in retirement, products like a guaranteed lifetime annuity should at least be considered by all retirees.

    By the way, I am not an agent, advisor, or broker-dealer.

  3. Ernesto@InsuranceYak.com Says:
    April 15th, 2008 at 2:23 pm

    Being on the distribution lists of many insurance sales organizations, I get email invitations to places like ‘Annuity U’. The reason these salespeople go to great lengths to close a sale: Fat commissions. 6% – 9% or higher commisions are not unusual, meaning for $100K annuity sale $6K to $9K commission for a few hours work. This type of product attracts ‘The Closers’ sales people who attach you emotionally and get the sale.

    That said, I’m perplexed at the finger wagging by the states attorney generals: Each annuity contract sold by a company is reviewed and approved by each state’s department of insurance. If AZ, MN, AL, or any state has heartburn about equity-indexed annuities or any particular product sold by any company, they can issue an order to the company to stop selling that product. The state legislatures can set guidelines for forms, disclosure notices, require any safeguard they want, require special training for salespeople, anything they want to make statute.

    Bottom line: no state can protect people from themselves. If you sign it, you should read it and understand it if your life savings is going into it.

  4. Jeremy Says:
    April 15th, 2008 at 4:20 pm

    I agree with Ernesto. While I think EIAs are a terrible product for 95% of the people out there, and they are constantly pedaled to the elderly who have no business having one, there are ways to stop them from seeing the light of day. But to have people pointing fingers at some shady salespeople isn’t where it should stop.

    These states review and allow these products to be sold, so if you allow it, you’ll have people trying to sell them. Yes, shame on the slick salespeople for leading people into a product that may not be appropriate, but shame on the state for allowing it to happen.

    I don’t like them, I don’t sell them, and I’d never recommend one, but the problem goes beyond the salespeople. If the attorney general or other regulatory body doesn’t like these products, they need to make the call and prevent them from being sold.

  5. JLP Says:
    April 15th, 2008 at 4:34 pm

    Ernesto & Jeremy,

    Those are good points. That’s why I thought it was funny when Frank Keating wrote this letter to one of the personal finance magazines last year.

  6. Michael Says:
    April 15th, 2008 at 5:14 pm

    Unfortunately, people go to these lengths to sell Mutual Funds, Limited partnerships, Mortgages, and all kinds of Financial Products. Its all about suitability, a five year CD, Blue Chip Stock, A government issued bond, and Triple A rated corporate bonds, could all be horrible investments in the hands of the wrong investor.

  7. AJC @ 7million7years Says:
    April 15th, 2008 at 9:42 pm

    “sales agents are able to purchase books that they did not write but can put their names on anyway to make it look like they are the book’s author.”

    Sounds a lot like blogging :)

  8. BenG Says:
    April 15th, 2008 at 9:51 pm

    Heidi –

    The only annuity that should be considered a good annuity is a fixed annuity. Reverse mortgages are a product of LAST resort – once the purchaser of a reverse mortgage sells the property, they are on the hook to pay back those funds.

    All of the other flavors of annuities are products that are sold rather than purchased. The only thing the typical flavor of Variable Annuity offers is tax sheltered growth similar to 401ks/Traditional IRAs. Unfortunately, they typically come with expense ratios of 1.5% or more.

  9. Heidi Says:
    April 15th, 2008 at 10:50 pm

    Thanks for the verification, Ben. I haven’t sold an annuity for nearly 10 years – back then the varible products you see now didn’t exist. I guess I’m from a simpler time…

    I agree that reverse mortgages are a product of last resort. I have said as much multiple times on multiple blogs. Yet people must be demanding them…every quarter or so there is a C-level executive in my office asking me why we haven’t developed a reverse mortgage solution (I used to be in product development for one of the nation’s largest defined benefit/defined contribution providers).

    I concur with those who said that the problem is that these products are even legal.

    My firm has seen a 30% increase in CD deposits in our bank over last year at this time(even though we 86’ed most of our marketing budget and our rates aren’t anywhere near the BankRate top ten). Clearly people are looking for safety and security as they enter the decumulation phase. These sales guys are slick and good at selling a ‘guaranty’ that doesn’t exist.

  10. Rich Says:
    April 16th, 2008 at 12:10 am

    “The only annuity that should be considered a good annuity is a fixed annuity.”

    I completely disagree.

    “Reverse mortgages are a product of LAST resort….”

    I completely disagree.

    “All of the other flavors of annuities are products that are sold rather than purchased.”

    I completely disagree.

    “The only thing the typical flavor of Variable Annuity offers is tax sheltered growth similar to 401ks/Traditional IRAs.”

    Wrong, wrong, wrong.

    “Unfortunately, they typically come with expense ratios of 1.5% or more.”

    …and sometimes you get what you pay for.

  11. Dylan Says:
    April 16th, 2008 at 9:15 am

    I was disappointed that Dateline focused almost entirely on the surrender penalties. While that’s very important, people may assume that if they can stick out the surrender period they will get all of the upside of investing in the market without participating in losses when, in fact, they will receive disproportionately low returns for the amount of liquidity risk they took on.

  12. JLP Says:
    April 16th, 2008 at 9:38 am

    Dylan,

    That’s a good point.

  13. Tony Says:
    April 18th, 2008 at 1:01 pm

    It never ceases to amaze me how everyone assumes that all index annuities are the same and that all the options within the contracts are the same.
    Anyone that “really” knows the differences, the good, the bad, the ugly, can argue either side of the coin.
    The real topic should be: “What makes a good -vs- a bad indexed annuity?”
    Just because I overpaid for a mutual fund and then lost 50% of my money doesn’t mean all mutual funds are bad!
    There are some serious things to consider when looking at indexed annuities.
    1.)The term (surrender period)different terms for different purposes!
    2.)Fees, good ones should be ZERO (MAYBE for an rider option.)it should be a choice.
    3.)Is there an MVA? The good ones, “NO”
    4.)Index choices and calculation methods(Tell me how I had clients getting double digit returns last year, as high as 17%)Sorry, I forgot, I’m only supposed to mention the losers and how they work!
    5.)Does 100% of the money go to work at time of issue? (any commissions or fees come out)again the good ones should be 100% goes to work!
    6.)Does the company have a history of dropping the caps below new money after year one? The good ones do NOT!!

    Anyways, not all index annuities are created equally, there’s as many options and features as any car on the road today, the question is, will it get you to your destination safely and does it fit YOUR needs, not the needs of the salesman?

  14. JLP Says:
    April 18th, 2008 at 1:05 pm

    Tony,

    That wasn’t the point of the Dateline investigation. Rather, it was the way these products are sold. Watch the episodes and you’ll see what I’m talking about.

  15. Dylan Says:
    April 18th, 2008 at 6:47 pm

    Tony says:
    “2.)Fees, good ones should be ZERO”

    That is ridiculous! Insurance companies and agents do offer these annuity contracts as an act of charity. There are always fees, they may be hidden, but they’re there.

    Annuities are contracts where you give the insurance company money at the beginning and then they give you money at the end. While they have your money, they use it to make more money so they can pay you back, but they keep a chunk for themselves. That’s the fee, or in other words, their cut. This is how insurance companies can afford to put their names on the tallest buildings in town.

    It is very disturbing when an agent implies “good” annuities have zero fees. If there are in fact good annuities for investors, why not be totally upfront about who else is making money and how much?

  16. Rick Says:
    April 19th, 2008 at 4:59 pm

    It is unfortunate that the AG Lori Swanson did not state that she likes annuities. I’m sure she must as from what I can determine her husband, at a minimum, is licensed to sell them and Variable Annuities at that…

    Some clarity about what the actual issue is would have been helpful. The issue I see is the cases where agents placed people in annuities that should never have been placed in them.

    Context, context, context. I’d like to be a bug on the wall when her husband explains what his wife is really saying – his comments are what should be published…

  17. Vik Says:
    April 28th, 2008 at 6:49 pm

    I saw the expose and have quite a bit to say actually. Hopefully I can take a few moments at a later time to repost and tell you more of what I think. But here goes…

    While I’m happy that Dateline has exposed the unethical practices of these salespeople, I do feel they are being negligent by not letting their audience know that these products can be very useful for some customers. It’s grossly skewed unfortunately.

    Adding 5 seconds to a segment of the piece where you call the Attorney General an ‘expert’ is misleading & frankly, ridiculous. She’s not a financial ‘expert’, she’s an attorney with legal expertise. Actually she’s less of an expert on these financial concepts than the agents that are actually unfortunately, misleading these customers and these agents are the same ones who graduated from places like the Annuity University with certifications that don’t really say much except add another acronym to their business card establishing some false credibility.

    And then asking her if she would buy the product or asking someone else if they would buy it or suggest it for someone else and then having them answer with a resounding ‘no’ is simply absurd. They’re not licensed salespeople themselves to make that determination. They’re not aware of all the products available and moreover, they’re not meeting with customers daily to determine if it’s a right fit within their portfolio. Having the attorney general read a paragraph in the brochure about surrender charges and then saying ‘well if you can’t understand, who can…?’ is also completely ridiculous. She’s an attorney, not a financial adviser. She might not understand the financial concepts being explained. That’s fine, but to assume that if she can’t understand it, no one else can, is unfair. We have customers from all types of careers/industries – owning IT firms, customers that own hotels & motels, and even some that worked for 30 years in a non-financial capacity with the government. Many of those seniors have not only understood these provisions and clauses, they’ve asked extremely intelligent questions. And I believe I’ve answered their questions properly. The attorney general is in no position to be assumed as having more knowledge about these products and concepts than anyone else – except maybe Chris Matthews! (sorry, a quick jab, had to do it! ha!)

    Some of these unethical agents actually did bring up issues that are of concern. Matthews said it was confusing and misleading. But when one of the agents was asked about the surrender charges, the agent went on to discuss the tax implications in the IRA. That’s very important and very pertinent. He’s explaining that because it was probably an annuity to be held in a qualified account, in this example, and IRA. It was probably a roll-over from the context of the conversation. So the agent was trying to say that you wouldn’t want to take this money out before you hit retirement agent because you’ll get hit with the 10% IRS penalty and also the tax they pay on the cost basis which makes me think it’s a traditional IRA. The tax on the cost basis could be very high obviously… 25%, 30%, who knows – so in addition to the surrender charges, the agent is saying that you wouldn’t want to take these funds out anyway because of the taxable nature of those funds within the IRA which can be possibly more damaging than the surrender before you hit retirement.

    Also – another agent brought up Long Term Care when the customer said ‘what if something catastrophic happens’. Dateline glossed over that but it could be something beneficial. Obviously we would need to know more about the customer but LTC can very well be something that can help in the case of a catastrophe so the senior doesn’t have to dip into their retirement account (the indexed annuity) to take care of them. Why should they reallocate their retirement funds to take care of them in the case of catastrophe if they have funds to put in an Long Term Care plan. Now it’s a separate issue if you bring up how expensive these plans are, one can debate about the pros and cons of LTC for hours. However the agent was trying to address the customer’s concern of a catastrophe.

    I just want to be clear that I do think the agents should have spent more time and been very clear regarding the surrender charges above the withdrawal limits… and by not doing so were misleading & engaging in unethical sales practices. But they discussed concepts that were pertinent to address when discussing what to do if one needs to access the cash above the limits and Dateline made it seem like they were trying to steer away from the issue completely… which was actually not the case.

    Finally, indexed annuities can be very useful for certain customers and I don’t think you said they’re not. But we shouldn’t generalize that it’s not good for 95% of all potential customers like Jeremy posted before… for seniors who have assets allocated intelligently in various products/vehicles, with the proper liquidity ratios, with the appropriate levels of cash flow to meet their lifestyle, with the right levels of risk based on their tolerance, diversified, within qualified & non-qualified assets… it might very well be that an indexed annuity is a great fit. The customer might have planned for catastrophe, they might have sufficient funds to live on, they might want the conservative nature of the indexed annuity in that it does provide guarantees on their principal assuming they hold it till the surrender period is up (which they might very well not have an issue with if everything else is planned for properly). And they can have funds in a CD or savings accounts at a bank, but the indexed annuity might just be a better investment for a portion of their overall portfolio, some of which might come out of the CD. The CD can have very low returns while the annuity can provide some pretty decent returns. Also CD’s are taxable… annuities are tax-deferred products… so there are many benefits of investing in these products for the long-term.

    Acronyms behind their names that required 1 class with no exam to earn, pictures on articles they never wrote, I agree – it’s all terrible. But there’s a tremendous amount of education that is done by very senior advisers in this industry. I personally spend at least hours every week educating myself and our partners with financial journals, analyzing financials, reading papers, magazines, books… taking classes and getting certified with licenses and accreditations that require hundreds of hours of study time, exam preparation.

    The expose gives a bad name not only to these unethical salespeople but irresponsibly also to the product itself.

  18. Long Term Care Says:
    April 29th, 2008 at 2:27 am

    Hi,
    Long term care insurance is best when you know you that some time you might need medical service for more than a few days or weeks. Long term care insurance offers protection for individuals against unforeseen or catastrophic long term illnesses, and provides them with the assistance that they would require. Thus, long term care insurance provides coverage to them and also offers financial security.

  19. GHL Says:
    April 29th, 2008 at 9:04 am

    Lori Sawnson is a trial lawyer. Her expertise is suing. In the real world the attorney gets 40% of the recovery right out of the injured person pocket.(ouch!!)How about 5% wouldn’t that be fair. In class action suits the attorney gets 40%cash and the injured get coupons. I think if attorneys got coupons also that would be great! Anyway I’ve read that Lori Sawnson is the new Elliot Siptzer. We can only hope.

    The fixed index annuity was designed to allow investors to potentially receive better returns over standard fixed instruments without market risk. Anyone who has sold them has seen those results.

    Being a fixed annuity man, I never liked the first year rate/renewal rate picture. The market determines the rate with the fixed index annuity. That was for me a great advantage for people and it is overlooked in all these discussions. People are better off in the fixed market place with these annuities.

    The surrender charges is all I hear. It is a contractual agreement. It has guarantees ie.. principal, minimum rate of return. Bonds are purchased to do that. Everyone has to win in the contract annuity holder,the company and yes the agent. Most annuity contracts the principal is available in three years.

    I would rather get 3% off the top of every dollar invested like the superior investment of mutual funds. The math $1,000,000.00 @ 3% for ten years equals $300,000.00. That is what I’m talking about baby!!!

  20. David Voegele Says:
    May 2nd, 2008 at 10:30 pm

    The Dateline piece was extremely misleading and was intended to sensationalize rather than inform. Many index annuities are a good products and fit into a conservative portfolio. Not everyone is interested in taking market risk. Most of the opposition is generated by advisors who are attempting to hang on to market share. As for Lori Swanson, I doubt she knows much about indexed annuities past what Chris Hansen encouraged her to say. Any one of the agents who was “exposed” on Dateline could probably whip her ass when it come to almost any level of financial knowledge.

  21. JLP Says:
    May 2nd, 2008 at 11:12 pm

    David,

    That was spoken like a true insurance salesman. Thanks for the mature response. You’re going a long way in adding credibility to insurance salesmen everywhere!

  22. mike Says:
    May 12th, 2008 at 9:13 pm

    Remember that NBC’s job is not to “expose the thuth,” but to sell comercials!!!!
    First, not all EIA’s are the same…DUH, do you homework. Ford, Toyota and Ferrari all make cars and there are many similarities, but there are also differences!!!
    Second, it is a CONTRACT! When you established your cell phone service, it was done on a contractual basis….Try and cancel before the term is up!!! READ and understand the contract.
    If someone had a negative experience with an EIA, verify the contract stipulations relayed by the agent and also the credibility of the Ins Co, Many of them are truly legit products, despite what “popular opinion” is. You and i wouldn’t be here if Christopher Columbus would have listened to “popular opinion”

  23. Peter Says:
    March 8th, 2009 at 6:01 pm

    With the market down (so much) and a lot of investors with over 40% losses. It looks like the equity index annuity may not be a dumb idea. Sham on NBC misleading investors and causing thousands of people to avoid the one investment that would have not lost them $ and is not a market timing investment!

  24. Matt Robbins Says:
    March 20th, 2009 at 2:20 pm

    The story was supposssed to be on EIAs, while the story was on crooked reps who are greety and lie. They make it harder for an honest advisor like myself amd my peers to do our jobs. I m not saying EIAs are good or bad.I have never sold one. I generally will use a VA with a living benefit rider, and sometimes fixed. With that said, for some people they are a good product. It depends on the person and what their financial needs are. Dateline should have spent more time on explaining that this was about poor salesman not about annuitties.

  25. Jeff Says:
    April 13th, 2009 at 7:27 pm

    I am looking at rolling my Roth IRA into a VRA that has a 7% guaranteed annual return, if the market doesn’t out produce that rate. Yes, the internal management fees are around 3% compared to my current 1.3% in my mutual fund Roth. I am willing to tie up $40,000 in this product for some 7% return piece of mind, knowing that I have $320,000 in my 401k that remains open to market risk until I retire in 16 years. I will continue to make my maximum Roth contribution each year for my wife and I, and put 15% of my income in the 401k. This seems like a no brainer to me. Tell me what I am missing.

  26. Jason Says:
    April 22nd, 2009 at 9:31 pm

    I assume by VRA you mean a Variable Annuity. You may not be missing anything. However keep the following in mind. The 7% guaranteed return will NOT be on the cash, or lump sum, or walk away value, but rather used as a calculation to determine how much yearly income you can take at some point in the future. In 15 years the cash value could be far below your $40,000 if you want a lump-sum. Or it could be way above $40,000. What you will have in 15 years is an “income account” worth at least $110,000. How much of the $110,000 will you be allowed to take out each year? It will depend on how old you are at the time, but probably in the 5%-6% range, so $5500-$6600 per year. If you post the exact name of the annuity and the income rider I will research it and tell you exactly how it works. The biggest thing to understand is that you are not guaranteed 7% growth per year as a cash value. That does not make the product bad but many agents are purposely vague on this detail. Just make sure you understand exactly how it works. It offers peace of mind for income guarantees only, not cash values.

  27. Vivien Says:
    December 23rd, 2009 at 11:43 am

    Why did this blog stop in April of 2009? Perhaps everyone started making money in the market and forgot about annuities?
    I maybe very dumb financially but investigating and reading about annuities and trying to decide which is the best that works for me, is like finding a “needle in a haystack”, especially with all the “commission hungry” salespeople.
    Is there anyone out there that would like to talk to me regarding which annuity would be best for ME and not for your commission profit? If so, please contact me. Thanks.

  28. Jason Gillette Says:
    June 22nd, 2010 at 9:34 am

    I have worked in the backoffice (policy services, claims, fraud investigations and inforce illustrations) of a large insurance company for 13 years and now I am licensed insurance agent in Florida. I very rarely saw agents not conducting themselves professionally. Most of them were hardworking people making a living just like anyone else. There is nothing wrong with equity indexed annuities. It is good investment vehicle. Better than any CD at the bank. There is nothing wrong with an insurance agent making commission on selling one to a customer. Every salesperson make some kind of commission on what they personally sell. “Dateline NBC” is sensational journalism, nothing more. The show’s producers use all sorts of lingo and special effects to make something look shady. Please realize “Dateline NBC” is an entertainment show, not a factual news show. Do your own research when looking for things to invest in. As a licensed insurance agent, I only provide my clients the information they need to make a informed decision regarding their individual situation.

  29. Antonio Says:
    September 30th, 2010 at 3:03 pm

    I am an insurance agent out of Utah who deals with Indexed annuities. I knew that there were crooked salesmen out there, but damn… The problem here is the salesmen. Indexed annuities are legitimate investment products, and yes they have high surrender charges, but so do many other investment products including 401ks. I was just working on moving someone’s money, and their 401k had a 20% surrender charge! You aren’t supposed to use that money for anything but retirement, leave it there to grow. The way I was trained, every detail good and bad should be explained, including surrender charges. Annuities aren’t for everyone, but they are legit. One last thing, no one should ever put all their money in one place, Diversity is extremely important. One should have three sources of income while in retirement, this does not include social security.

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