A word of caution before you cash out your IRA and put it into an annuity

DennisBeaver February 23, 2013 • By Dennis Beaver

“My parents are both 70, retired and receiving Social Security. They have been savers, live frugally and now have close to $1 million in their IRAs. Recently, they attended a free retirement planning seminar dinner, hosted by an insurance annuity salesman,” Robin’s email began.

“He has urged them to roll their IRA money — now in a low interest paying CD — into a guaranteed insurance annuity which will provide a lifetime income. They have no debt, own their home free and clear, but still worry about having enough money to live off of and that’s why the annuity seems attractive.

“I am no financial expert, but who guarantees these things? What if the company got into trouble? What would happen to their money? We all have read your column for years and would appreciate any advice that you can give.”

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“Your reader has good reason to be worried, and her parents should count their blessings that they have a daughter like Robin,” were the first comments from New York attorney Edward Stone, when we read him the email.

Stone is one of our country’s experts in insurance company insolvencies. “While rare, when annuity issuers fail, the results are tragic,” he told You and the Law.

“There is so much that the average consumer does not understand about annuity risks. In today’s economy, there is a far greater chance of insurance companies getting into trouble than at any time in recent memory,” Stone points out.

“The folks who sell annuities love the word Guaranteed, often telling the public that all annuities are safe, secure investments and that no one has ever lost a cent. That is absolutely not true.

“Want to guess who ‘guarantees’ the monthly payments promised by XYZ Life and Annuity Company after you give them the money you’ve saved for years?” Stone asks, with a sad quality in his voice.

“No-one! They can’t guarantee themselves and are not federally insured. State guaranty associations may step in to cover some losses. But if Mom and Dad live in California they would have just $250,000 protected. Even worse, these guaranty associations — most of which are unfunded — favor themselves over consumers, which can make losses even worse. This safety net is leaky at best.”

Low-interest = trouble

“Insurance companies need to earn more on their invested assets than they pay out to policyholders. That works fine when they can buy bonds or other safe investments with a good rate of return, in a normal interest rate environment. But with abnormally low interest rates, several annuity companies have serious asset/liability mismatch issues making their long term survival highly questionable,” Stone explains.

The reason for his sadness became apparent when he told us about the thousands of people who owned annuities issued by the Executive Life Insurance Companies in an insurance industry failure of epic proportions.

“Many of the people who received Executive Life annuities obtained them as personal injury structured settlements, intended to pay compensation for a lifetime. But after both California and New York regulators bungled the takeovers and allowed insiders to profit at the expense of victims, many lost over 50 percent of what they were promised when they settled their personal injury cases.

“But also, ordinary people — just like Robin’s parents — were sold Executive Life annuities to fund their retirements, and are now facing severe benefit reductions,” Stone notes.

“Most individuals had no idea of the risks associated with an Executive Life annuity, even though the financial soundness of the company had been in doubt for years. They were highly rated and offered attractive payouts.

“Many individuals were urged by their attorneys and insurance brokers to go with Executive Life,” Stone points out.

“But many brokers were paid large and undisclosed up front commissions by property and casualty insurance companies for putting all of victim’s eggs in that one, ‘executive’ basket. No one looked out for the victims.”

Annuities are not bad — if you shop wisely

“All annuities are not created equally,” Stone stressed. “Some products make sense and fill needs. That said, read the fine print and never sink everything that you have in any one type of investment product.

“For example, Robin’s parents may want to consider buying several types of annuities from healthy, well run ‘mutual’ insurance companies. Always buy smaller face values — below state guarantee limits — and only from issuers which do not have common corporate ownership,” he cautions.

“I have sat with people who just cried, seeing the money they depend on to survive cut in half. No one should ever go through anything like this.”

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

A word of caution before you cash out your IRA and put it into an annuity

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