Articles Posted in Annuity Scams

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On February 4, 2013, the SEC filed suit against Richard K. Olive and Susan L. Olive in the Southern District of Florida in a charitable-gift-annuity scheme. The Olives allegedly drew $75 million from more than 400 investors in at least 30 states.

In March of 2008 the Olives took over the inactive nonprofit, We The People, which held no assets between late 1990s and early 2008. The Olives signed employment agreements with the inactive nonprofit and were allegedly aiming to raise money via sales of charitable-gift annuities in exchange for commissions.

The Olives told clients that they could exchange stocks, annuities, real estate, and cash for charitable-gift annuities that purported to make charitable payments for the remainder of the client’s life. Clients also were falsely told that We The People kept its reserve account in a “trust account” and that the products were covered with reinsurance to “minimize the risk.” Additionally, the Olives paid themselves $1.1 million in salary and commissions, plus hundreds of thousands in unauthorized payments.

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According to a recent article in InvestmentNews entitled, Back to square one, insurance issuers have started changing the terms to in-force variable annuity (VA) contracts. These changes are detrimental to policyholders because they take away some of the benefits which caused the policyholder to purchase the VA in the first place. For example, according to the article MetLife modified certain VA contracts to prohibit policyholders from making additional contributions. These policies provided benefits such as 6% guaranteed income stream, which was attractive to some investors. In many cases, investors in these polices based their retirement plan on this 6% guaranteed income stream.

MetLife made this change to its contracts simply to line their pockets with more profit. because According to the article, “low interest rates have increased insurers’ cost of hedging the living benefits attached to the annuities, making the VA business capital-intensive and less profitable for the companies.”

Sadly, these contractual changes will likely cause additional damage to investors who will undoubtedly be approached by financial advisors to use the proceeds to purchase another VA. This switch, also known as a 1035 exchange, will subject investors to surrender charges and longer surrender penalty periods. To make matters worse, the financial advisor will receive another commission for selling the new annuity.

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It is no secret that the financial markets are down and investors are looking for safe investments.  It is also no secret that interest rates on CDs and money market account are very low.  The combination of volatile markets and a low interest rate environments create a perfect storm for sales pitches related to deferred variable annuities and equity-indexed annuities.

On the surface, these annuities appear to be the perfect solution.  However, you need to know that these products in general are very complex, extremely expensive, and not appropriate for most investors, especially those in retirement. Because these investments so complex, most people who are in them did so at the recommendation of a trusted financial provider.  Before purchasing one of these products, it would be wise to educate yourself using unbiased educational information without the sales pitch.

Self-education is the most effective way to avoid becoming a victim of bad investment advice.  One thing you need to know off the bat is that these products pay extremely high commissions to the brokers who sell them,  Variable annuities typically pay an upfront commission of 5-7%.  Equity-indexed annuities are even worse, paying commissions of 9-11%.  Compare that with the commission paid on the average mutual fund of 2%.