investment Archives - Dennis Beaver

The problem with insurance annuities

Dennis Beaver — Mon, 29 Aug 2016 04:31:38 +0000

August 27, 2016 • By Dennis Beaver

For anyone thinking of moving a large amount of money from a retirement account into an insurance annuity at this time, it could be a terrible decision.

“You’ve got to think this over very carefully. Do not be conned by a salesman looking only for a huge commission on the sale of an annuity, and, absolutely do not put all your eggs in one basket!” warns New York attorney Edward Stone.

As one of a handful of lawyers in North America who specialize in life insurance/annuity company failures — that’s right, failures with policyholders suffering huge losses — Stone’s advice merits serious attention, especially now.

As he explained:

“Insurance companies are in a near-zero interest rate environment which is a very real threat to their ability of honoring promises to policyholders. How can they continue to guarantee rates of return that exceed actual returns on their investments? Either you rob Peter to pay Paul or chase risk or some combination of both.”

He is not alone with this warning. In April of 2015, Laurence D. Fink, CEO of BlackRock Inc., the world’s largest asset manager, addressed the reality of what low interest rates mean to the survival of life insurance companies:

“Low interest rate policies by central banks around the world threaten insurance companies and pension funds. As we live in a world of persistent low rates and negative rates, we are destroying the value of pension funds [and] the viability of insurance companies.”

As we all know, those rates are virtually the same, which Stone see as compounding, “ ‘Concentration Risk’ with certain providers having taken on billions of dollars in pension obligations transferred by some of America’s largest corporations — Verizon, AT&T, Motorola, Ford, GM — to list just a few.

“They wanted to rid themselves of pension obligations to employees and retirees, so they took pension assets and gave that money to several of the nation’s largest life insurance companies who then issued group annuity contracts to replace defined benefit plan obligations.

“An enormous bet was made that they can earn more on their assets than they promised to pay out overtime to annuitants. These promises may prove to be extraordinarily difficult to keep,” Stone observes, explaining why:

“Historically, safe, fixed income corporate and governmental bonds were the mainstay of a life insurer’s investment portfolio. Laddered bond portfolios were constructed to match expected payout obligations. It was safe and predictable.

“But now, it’s a different world, and policyholder’s money goes into riskier and riskier investments, chasing yield. Instead of boring and safe, billions of dollars of retirement money is in the Wall Street Casino, making life insurance products less secure than ever before.”

We asked, “Does this mean that annuities are to be avoided, or that if you have one, you are on a sinking ship?”

“Far from it,” he quickly replied. Annuities can be appropriate and reasonably safe if you know how to protect yourself.”

Stone’s warning, “Not All Eggs in One Basket” is more important to heed today than ever before, for three reasons, as he describes:

(1) Salespeople tell you that if a company gets in trouble, others will always step in to protect policyholders and no one has ever lost a penny with a life insurance or an annuity. That is completely false. Millions of dollars of policyholder’s money has in fact been lost in company failures.

(2) You may hear that FDIC protects policyholders in the event of a failure. This is false.

(3) While illegal to use as a sales tactic, you may also be told that every state has a Guarantee Association which fully protects amounts in a life insurance policy or annuity.

This is partially correct.

“State Guarantee Associations cover insurance company insolvencies, but the amount of protection varies greatly depending upon your state of residence, and in most instances ranges from 250 to 500 thousand dollars per individual, per lifetime, per insurance company, regardless of the present value of the annuity or life insurance policy. In California, it is $300,000.”

This means the person who takes a million dollar IRA and puts it into an annuity with a single insurance company could lose hundreds of thousands of dollars if it failed. That has happened before.

“The solution is to use more than one annuity company, regardless of what a sales person wants. Be sure that your present cash value is well below your state’s Guarantee Association limit.

“We are facing a pension crisis which is already putting a strain on the insurance industry. No one is too big to fail,” Stone cautions.

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

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What landlords, tenants should know

Dennis Beaver — Mon, 11 Jul 2016 03:20:41 +0000

July 9, 2016 • By Dennis Beaver

Today’s story will be of special interest to both tenants and landlords — anyone considering the purchase of rental property — wanting to increase income, “which took off like a 4th of July skyrocket following the stock market crash of 2008,” Pasadena-based Jon Dolan of Dolan and Knight Property Management told You and the Law.

“Even today, we see financial refugees from the stock market who cash out, purchase apartments, or single family residences, which they consider as relatively safe investments and not too difficult to manage in their retirement.

“For some, it is the worst financial decision of their lives, as few people are emotionally equipped to be landlords, especially the elderly, and this is not a put-down of older people, just a statement of fact from our experience.

“If you do not deal well with a drunk, irresponsible tenant behind in the rent yelling at you, either, do not become a landlord, or find a competent property management company and hope that they know the law and will keep you out of hot water. Check them out – the last thing you want is an incompetent property manager,” Dolan stressed.

As you’ll see, it’s a pity that 85 year-old “Henry” (who resides in Los Angeles) didn’t hear Dolan’s advice before buying a two bedroom condominium on Greenfield Avenue in Hanford in November of 2015 and hiring a Property Management firm we will call IAU, standing for Incompetents Are Us.

Had he Googled their name, we might never have heard from our reader, “Laura,” who became Henry’s tenant on Dec. 17, 2015, as he would likely hired a different property management company, after reading:

Horrible communication!! They lie and tell the tenant that they are in communication with me and that I have not responded. I request information and, if I get a response, they completely avoid the subject! Any problems are left for me to deal directly with the tenant. I’ve even left messages for the business owner to call me back regarding the issues, but she doesn’t return phone calls either.

“Rocky” was IAU’s Hanford manager, and had Laura sign a California Association of Realtors “Residential Lease or Month-to-Month Rental Agreement” with “Central Heating and Air Conditioning maintained by owner” stated on the lease.

The term was from Dec. 17, 2015, to Dec. 17, 2016. But neither (A) the Month-to-Month, nor (B) the Lease sections were marked.

“The result of this glaring failure to designate what kind of a tenancy it is means that the tenant can consider this as either a year-long lease or month-to-month, regardless of any discussions had before signing the lease,” Dolan commented, adding, “The lease form tells you to check A or B! This is absolute incompetence.”

“Upon moving in on December 18th with my young children, I realized there was no heat, reported this to Rocky who told me, ‘It’s not my problem — It’s not our obligation of providing you heat. Call the Gas Company.’ “

Of course, that is complete nonsense and violates the Implied Warranty of Habitability protecting tenants from Simon Legree landlords.

“I did. They came out on January 8th and explained that someone had failed to turn on the gas! So we had weeks without heat, my kids having to live with relatives.

“Repeatedly, I reported that the garbage disposal and a toilet were not working. Rocky said, ‘You just have to wait.’ Finally, a month later, my brother fixed the toilet. Two months later they fixed the disposal.

“The air conditioner failed in May and I reported it. Over a month’s time they sent three different A/C companies but none were given authorization to repair the system! Rocky said that legally the landlord was not obligated to provide heat or air conditioning! That’s when I contacted you.”

We confirmed what Laura told us by speaking with Rocky who wins no awards for being either competent or polite. Next, we spoke with the owner, Henry:

“You are obligated to provide heat, plumbing in good working order, and in our climate where it is often well over 100 degrees, to promptly fix the A/C ! So it is in your interest to let her out of the lease and make a substantial refund.”

He agreed. He had to. For Henry is a “Lion in Winter,” an attorney for over 58 years, highly respected with a State Bar award in his name, “Looking for a better price on repairs,” was his justification that legally doesn’t fly.

Laura has moved out. Legally, she could have in December, and we’ll tell you why in a future story.

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

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