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Annuity Pitches Can Mislead Older Investors


Elder-law attorney Ed Long has a rather radical proposal to help protect seniors from unscrupulous insurance peddlers. He wants the state Legislature to require that all annuity sales to people older than 60 be reviewed and approved by an independent advisor before the sale can become final.

Why such a review? Because too many people are trying to induce older Americans to buy unsuitable annuities, which are insurance contracts with tax-deferred investment features. Regulators and financial planners point to the growth of annuities that are often sold in the guise of estate planning and to seminars that push annuities as a way to qualify for Medi-Cal, the state and federal health program for the poor.

"These salesmen hold 'public information' seminars to talk about long-term care costs and give only half of the picture," said Long, executive director of the nonprofit Healthcare & Elder Law Programs Corp. in Torrance. The annuity pitches "mislead people into buying annuities that are unsuitable, ill-advised and inappropriate for their situations."

Annuities can have a legitimate role in financial plans, and indeed annuity sales are booming. An estimated $164-billion worth were sold last year, triple the number of a decade ago. The majority were variable annuities, retirement saving vehicles that allow tax-deferred investments in a mix of stocks, bonds and cash. The rest were fixed annuities, which guarantee an interest rate for a certain length of time.

The problem comes when annuity buyers don't fully understand the drawbacks.

Some insurance salespeople, as well as some of Long's elder-law peers, encourage people to buy fixed annuities as a way to skirt Medi-Cal's income and asset limitations and qualify for coverage.

Medi-Cal, or Medicaid as it is known in other states, is the only government program that pays for most custodial nursing home care. Certain kinds of carefully structured fixed annuities can indeed legally turn assets that might otherwise disqualify an applicant into an income stream that might be exempt from Medi-Cal rules. The rules are complex, but suffice it to say there are many drawbacks to the annuity approach that a commission-based salesperson might not bring to the older person's attention.

For example, annuities can be costly, with higher fees than comparable investments and significant surrender charges. Also, seniors who buy these annuities often lose inflation protection, because the investments may grow too slowly to protect buying power. Investors also lose flexibility, because it can be difficult or impossible to get money out. Annuities have some tax disadvantages along with their tax advantages; unlike stock, bond or mutual fund investments, income from annuities is not eligible for capital gains rates and is instead taxed at higher income tax rates.

In addition, some salespeople encourage seniors to cash in other investments or withdraw money from retirement accounts to buy the annuities, actions that can create a huge tax bill, Long said.

Then there is the question of whether people who can afford to pay their own way should be trying to qualify for Medi-Cal in the first place.

Some advocates of Medi-Cal planning insist it's a smart way to ensure a hard-earned nest egg isn't depleted by nursing-home costs.

Critics question the ethics of deliberate impoverishment and say seniors make a bad trade when their desire to leave an inheritance causes them to give up financial flexibility. Although nursing homes are required by law to treat Medi-Cal and private-pay patients the same, many of the best homes do not accept Medi-Cal patients, and Medi-Cal does not cover the cost of care in the patient's home, which is where many seniors would prefer to stay.

No one knows how many "Medi-Cal annuities" are being sold. But California state officials consider the sales a serious enough threat to the program's viability that the Department of Health Services is drafting regulations that would help the state get back some of the money that seniors are trying to keep, said Lea Brooks, department spokeswoman. One proposal would require any money left in the annuity at the patient's death to be forfeited to the state, she said.

The state already recovers about $40 million a year from Medi-Cal patients' estates, largely by making claims against their homes after their deaths. It's a drop in the bucket; Medi-Cal's budget is more than $22 billion a year.

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