Avoiding Annuity Scams: Essential Tips for Protecting Yourself from Fraudulent Offers

With annuities, you can secure a steady income stream for retirement. These financial tools, however, have become targets for scammers who exploit unsuspecting people. The complexity of annuities makes it imperative to remain vigilant and take proactive steps to protect yourself from common scams.

This blog post examines common annuity scams, highlights warning signs, and offers practical tips to protect your hard-earned money. After all, the ability to recognize these scams and take proactive measures will enable you to make informed decisions and ensure a secure retirement.

Annuity Fraud: Unmasking the Deception

Annuity fraud occurs when dishonest agents or insurance companies mislead consumers into buying unsuitable or misleading annuities. In many cases, these products come with high fees and few benefits. Even though annuities are legitimate financial tools, their complexity can make them vulnerable to scammers.

Even with government regulations in place, fraudulent practices can still take place. As a result, investors, particularly seniors, are at risk of buying inappropriate annuities or having their contracts sold at unfair prices.

In order to protect yourself, annuities should be just one component of your diversified retirement plan, not your only investment. By doing so, you reduce the risk of falling victim to scams.

Annuity Scam Targets

People of any age can be victims of annuity fraud. Seniors, however, are more vulnerable and should be especially cautious. In fact, older adults are prime targets for financial scams. Based on the FBI’s 2023 Elder Fraud Report, scams targeting older adults caused over $3.4 billion in losses in 2023 — an increase of approximately 11% over the previous year. As a result of elder fraud, the average victim lost $33,915 in 2023.

Sadly, unethical agents may target seniors with declining physical or mental health. Particularly, they may try to convince them to invest in annuities unsuitable for their age or health.

Often, agents pressure seniors, including those with conditions such as Alzheimer’s, into products that lock away funds for decades. In addition, some contracts allocate the remaining funds to the agent or insurer instead of the client’s heirs, ensuring profits remain with the agent.

Older adults may be tempted to use these tactics if they feel their investments are unsafe. When unethical agents exploit seniors, they may lead them to make impulsive decisions or reveal too much personal information about themselves.

Annuity Scams: Protect Your Nest Egg

Unfortunately, annuity scams are a real threat. Even though many states have strict regulations to protect consumers, these scams still manage to slip through. To avoid annuity scams, let’s examine some of the most common types of fraud.

Shady sales tactics.

• Twisting and churning. Have you heard of “twisting” or “churning”? Some agents use these sneaky tactics to make a quick buck. In twisting, agents convince you to switch your current annuity for a new one that pays lower returns or costs more. The process of churning is similar but involves frequent changes within the same organization. The two practices can be both costly and unnecessary.
• High-pressure sales. You may be pressured into buying an annuity by agents who use fear-mongering or overly aggressive sales tactics. Good financial advisors will answer your questions and explain your options.

Misleading information.

• Misrepresenting the product. Agents should never misrepresent or oversimplify annuity details. They might gloss over important information, such as fees, penalties, or the risks involved.
• Promising “no risk.” There is no such thing as a risk-free investment. As such, whenever an agent promises a “risk-free” annuity, be skeptical. Although some annuities offer a higher level of protection than others, all carry some level of risk.

Other common scams.

• Fake insurance companies. To sell fraudulent annuities, scammers might create fake insurance companies. You should always check with the insurance department in your state if the company is legitimate.
• Fraudulent beneficiary designations. A few unscrupulous agents might alter your beneficiary information for their own benefit or that of a company.
• Unsuitable products. Agents can recommend annuities not aligned with your financial goals or risk tolerance.

Tips to Protect Yourself From Annuity Fraud

Protecting yourself from annuity scams takes vigilance, knowledge, and proactive steps. To protect yourself, follow these tips;

Don’t make decisions without thorough research.

Before purchasing, get as much information as possible about the product and the company. Check out reviews, understand the annuity fees, and compare products.

Also, verify a company’s reputation with the Better Business Bureau (BBB) or the National Association of Insurance Commissioners (NAIC). You can also check the company’s AM Best Rating and only do business with those with a good rating. A good reputation and a history of good customer service are also good signs.

Licensing and registration should be verified.

You should confirm your financial advisor or agent is licensed and registered to sell annuities. Many scams involve people posing as financial professionals who are unlicensed. If you want to ensure that they are properly credentialed, you can use resources such as your state’s insurance department or FINRA’s BrokerCheck.

Become familiar with the fees and penalties.

Fees associated with annuities include mortality and expense charges, administrative charges, and surrender charges. You should request a detailed breakdown of all the fees related to the annuity before signing it. By doing so, you will avoid surprises and gain a better understanding of the costs.

Obtain a second opinion from a trusted advisor.

If you’re contemplating buying an annuity, consult an independent financial advisor whose interest isn’t vested in the outcome. Your advisor can provide an unbiased opinion about whether you are a good candidate for an annuity.

Don’t make a hasty decision.

If an offer has a time limit, be cautious. Often, scammers create an urgency that prevents you from thinking critically or seeking outside advice. Before committing, ensure you understand the product and read all terms and conditions.

Prevent the premature sharing of personal information.

Be cautious before sharing sensitive information, such as your Social Security number, with an agent or product you haven’t thoroughly vetted. Scammers often ask for personal information early on to commit identity theft or fraud.

What to Do if You Suspect Fraud

If you believe that you were scammed or you have concerns about an annuity you’ve purchased, you should act immediately;

• Contact your state’s insurance department. If you believe a company or agent is fraudulent, report it to your state’s insurance department, as they can investigate and take action.
• Report to the FTC and FINRA. You may be able to resolve your issue with the help of the Federal Trade Commission (FTC) and FINRA (if you are dealing with a licensed broker).
• Speak with an attorney. If significant losses have occurred, a financial or elder law attorney can guide you on the next steps.
• Contact consumer protection agencies for assistance. Several organizations, including AARP, offer resources to assist people scammed by financial scams, especially seniors who are more likely to become victims of annuity fraud.

Final Thoughts

Although annuities can be valuable retirement tools, they aren’t suitable for everyone and are often the target of scams. It is possible to safeguard your financial future if you understand the common types of annuity fraud and follow these protective measures.

If you want to get independent advice, take time to ask questions and consult a legitimate financial advisor. You can also safeguard yourself against annuity scams by being cautious and informed, ensuring your investments work for you, not against you.

FAQs

What is an annuity scam?

Fraudulent annuity schemes involve tricking individuals into purchasing annuities that are not suitable or outright fraudulent. Older adults are often preyed upon by scammers who promise high returns or guaranteed income, but these annuities may have high fees, limited liquidity, or even no liquidity.

How do annuity scams work?

Annuity scams can take many forms. The following are some common tactics;

• High-pressure sales tactics. Scammers aim to get people to buy an annuity quickly before they have time to think things through.
• Misleading information. Some scammers claim that annuities provide guaranteed returns or that they are low-risk investments.
• Unsolicited offers. Scammers can contact people without warning, offering to sell them an annuity.
• Churning. Even if the new annuities aren’t a good deal, scammers may convince people to sell their existing annuities and buy new ones.

What are the warning signs of an annuity scam?

If you think an annuity is scamming you, you’ve got a few red flags;

• There is pressure on you to buy an annuity as soon as possible.
• Your salesperson is making unrealistic promises about your investment’s return.
• The salesperson does not answer your questions about the annuity.
• The annuity requires a large investment.
• You are told to buy the annuity to avoid paying taxes or other fees.

What should I do if I think I’m being scammed?

Here are a few things you can do if you suspect you were a victim of an annuity scam;

• Do not invest any money.
• Get in touch with your state’s insurance department.
• Inform the authorities about the scam.
• Consult a financial advisor.

Can I get my money back from an annuity?

There are instances where you can get your money back from an annuity. For example, free-look periods allow you to cancel your contract and get your money back without paying surrender charges.

Image Credit: Anna Tarazevich; Pexels

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