Problems Surrounding the Complexity of Annuity Products

On Sunday, The Wall Street Journal reported the felony-theft conviction of Glenn Neasham who had sold a complex annuity to an elderly woman. The conviction -- which comes with a 90-day sentence -- was handed down by a state-court jury in Lake County, CA. From the article:

The case underlines authorities' continuing discomfort with "indexed" annuities, savings products that pay interest tied to the performance of stock- and bond-market indexes. Insurers guarantee that buyers won't lose any of their principal but in return charge sometimes-steep penalties if investors withdraw their money early, for periods that can stretch beyond a decade.

Indexed annuities are attractive to agents because of the high commissions they receive from insurers, which can be 12% or more of the invested amount.

It is our position that deferred annuities -- those annuities that have a long deferral period before distributions begin -- are unsuitable for the elderly since the deferral period can extend beyond their actuarial lifetime.

Also this weekend, Investment News reported on the complexity annuities add to divorce proceedings. In particular, the division of annuities among the parties in the divorce often results in a significant decrease in realizable value due to the illiquidity of the products as enforced by high surrender charges and penalties. From the article:

With nearly one in two marriages ending in divorce, financial advisers who deal with divorcing couples often face complex problems connected with untangling annuities that are in the pool of shared assets.

With divorce attorneys typically unaware of the nuances of annuity contracts and the various ways insurers treat contracts in the context of divorce, and with advisers typically out of the loop when settlements are hammered out, the problem lands in the lap of advisers.

Speaking directly to the issuer of the annuity for more information or options in this situation might be a good starting step for annuity holders, but there is an inherent conflict of interest here and one should not rely solely upon the advice of the issuer. Financially sound annuity valuations are possible, but often require very complex simulations to incorporate their extraordinarily complicated payout structures. This analysis would typically be beyond the means of most investment advisers -- and certainly could not be expected from unsophisticated investors.