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How The Life Insurance Industry Rushed to Sell Annuities To Near Retirees

pig and dollars

As older Americans' appetite for guaranteed retirement income grew over the years, so did the range of annuities offered by insurers to people eager to trade lump sums for future monthly payments.

With pensions quickly vanishing, and 401(k)s tied to unpredictable markets, retirees increasingly looked to financial products like variable annuities that promise a comfortable retirement without the risk and tax consequences of other investments.

Between 2001 and 2010, life insurance companies sold about $1.4 trillion worth of variable annuities, according to an industry group.

In an investigation by the nonprofit ProPublica, journalist Jake Bernstein chronicles how the life insurance industry over the years moved away from the "business of insuring lives to peddling complex financial products," sometimes to the detriment of older or sick people.

Variable annuities are not suitable as short-term investments or for very old clients, and they tend to be more expensive than other financial products. Some insurers and brokers have come under fire in recent years for selling them to people who really shouldn't be buying them.

Bernstein writes that in the years leading up to the financial market crash of 2007-2008, insurers were so eager to sign people up that the companies got burned themselves. They wrote "billions worth of contracts that now imperil their financial health."

ING has exited the business and is writing down billions in losses, Bernstein reported. "Transamerica is trying to buy back some of the variable annuities it sold to policyholders. The French insurer Axa is offering its variable annuity holders money if they surrender their death benefit guarantees."

Bernstein examined the case of a Rhode Island financial planner, Joseph Caramadre, who prosecutors allege illegally exploited insurers' annuity contracts for his own gain. He contends he was only doing what the fine print allows.

Instead of the typical setup - a retiree buys the annuity and the death benefit is paid to the beneficiary, usually a spouse or child - he came up with an alternative. Caramadre or one of his clients would buy an annuity for someone who was not expected to live long, with whom they had no relationship. They would name themselves as beneficiary and collect profitable payouts when that person died. Along the way, prosecutors say, identities were stolen, families were deceived and companies were swindled.

Financial experts warn older adults who are considering a variable annuity to understand its payout and fee structure before signing on, and to determine its suitability as an investment.

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