Monet Garden Pond at DBG
Annuities are sometimes described as an emotional investment vehicle because they guarantee lifetime income for a person. This can help an elder feel more secure about their money, at least about their monthly income. This security comes at a cost. There is lots of information, probably too much information about annuities available on the internet. This is where it is a good idea to employ one’s “crap detector” (as cyberculture expert Howard Rheingold identifies it in the 2012 book NetSmart) but it is not simple for these types of investments because they are often very complicated instruments.
Annuities tie up someone’s money long-term, and the terms of the annuity – both risks and benefits, and especially how the risk is monetized as a cost of the arrangement, should be looked at carefully. The annuity is governed by a contract and generally provide periodic payments over a specified amount of time, provide benefits to a designated beneficiary (if the annuitant, the person on whose life the annuity contract is based, dies prior to receiving payment),and can provide certain tax deferred benefits.
Sometimes people sell annuities that are touted as Medicaid friendly, but Medicaid rules, which vary from state to state, change often. Bottom line is that some annuity sales persons want to sell an annuity that is based simply on the insurance company or other financial institution taking a larger sum of money and doling it out in small portions over a course of years. Making an investment that may or may not be appropriate or a good idea for a particular individual is often complicated by the perceived “need” to qualify for immediate benefits. Annuities are only part of the picture.
First off, what is an annuity?
The SEC’s website provides a succinct overview of the three basic types:
- Fixed annuity. The insurance company promises you a minimum rate of interest and a fixed amount of periodic payments. Fixed annuities are regulated by state insurance commissioners. You can check the Colorado Commission on Insurance website here about the risks and benefits of fixed annuities and to confirm that your insurance broker is registered to sell insurance in your state.
- Variable annuity. The insurance company allows you to direct your annuity payments to different investment options, usually mutual funds. Your payout will vary depending on how much you put in, the rate of return on your investments, and expenses. The SEC regulates variable annuities. FINRA has a succinct explanation of variable annuities here.
- Indexed annuity. This annuity combines features of securities and insurance products. The insurance company credits you with a return that is based on a stock market index, such as the Standard & Poor’s 500 Index. Indexed annuities are regulated by state insurance commissioners.
Okay, I might as well go the full gamut here and mention “life settlements” while I’m on the topic of insurance and elders . . . . Say what? I first heard about these arrangements under their much more glamorous sounding name of “viaticals” or the acronym “STOLI” (stranger originated life insurance). These settlements became popular during the AIDS epidemic, but the first instance of it being approved comes from the 1911 U.S. Supreme Court decision of Grigsby v. Russell, 222 U.S. 149 (1911), Dr. A. H. Grigsby treated a patient named Mr. Burchard, who wanted a particular surgical operation but could only pay for it with a life insurance policy. Burchard sold Dr. Grigsby his life insurance policy in return for $100 and for agreeing to pay the remaining premiums, and so the first viatical settlement transaction was created. After Burchard died, Dr. Grigsby attempted to collect the benefits but the executor of Burchard’s estate successfully challenged the arrangement. The case eventually reached the U.S. Supreme Court where Justice Holmes stated in relevant part that “so far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.” 222 U.S. at 155-56. Okay, once again I’ve gone off-track in this post about annuities. . . .!
I am writing this because in my work people contact me and in the scope of gathering information I often encounter difficulties and misunderstanding on the part of annuitants, beneficiaries and other survivors of annuity contracts. The remorse and misunderstanding factor on these types of investment contracts can be high – so take a calm and measured look at these before you or someone you care about signs a contract!
Wondering about where to get more information about these annuities? Here a link to the FINRA warning about these investments – FINRA is short for Financial Industry Regulatory Authority (for those of us who took a securities law class in the previous century, this agency was formerly known as NASD – the National Association of Securities Dealers). Where the Securities and Exchange Commission (SEC) is a government regulatory agency, FINRA is the largest self-regulatory organization in the American securities industry.
To recap, annuities seem to be appealing to many older folks (boomers included) because of their emotional appeal of guaranteed income for life. This article from Business Week is nearly ten years old, but is still relevant. Best to explore and discover the best means for what to do with your limited funds in retirement and make sure that you have considered all the options before alighting on the one that is right for you – especially if it is an investment that cannot be undone.
©Barbara Cashman 2014 www.DenverElderLaw.org