“My honest opinion? I wouldn’t buy one of these, but I really want the commission that the insurance company is going to pay me if you buy one.” — The Vigilant Investor, p. 203
It’s a story that is sending shivers down the spines of annuity salesmen — long overdue shivers. A broker who sold an annuity to an 83-year-old woman was convicted of a criminal charge of felony-theft on the basis of that sale. He was sentenced to 90 days in jail. The sad thing is that the financial incentive to sell annuities is so strong that it might well overcome the reluctance to spend time in prison, unless, of course, other prosecutors step up and file similar charges. According to The Wall Street Journal story about the case:
Last month, Glenn Neasham, an independent insurance agent, was ordered to spend 90 days in jail on a felony-theft conviction for selling a complex annuity to an 83-year-old woman who prosecutors alleged had shown signs of dementia.
The agent’s conviction, by a state-court jury in Lake County, Calif., is sending shivers down the spines of Mr. Neasham’s peers across the country. They can’t recall another case where an agent was sent behind bars for selling an annuity.
Agents “who steal from vulnerable seniors will not get away with their shameful tricks,” Steve Poizner, the state’s then-insurance commissioner, said in a statement in 2010 when Mr. Neasham was arrested.
Mr. Neasham, 52 years old, maintains the woman appeared fine and wasn’t confused at the time of the 2008 transaction and that he acted appropriately. His lawyer has filed notice of appeal, and a bail hearing is scheduled for this week.
The case underlines authorities’ continuing discomfort with “indexed” annuities, savings products that pay interest tied to the performance of stock- and bond-market indexes. Insurers guarantee that buyers won’t lose any of their principal but in return charge sometimes-steep penalties if investors withdraw their money early, for periods that can stretch beyond a decade.
Indexed annuities are attractive to agents because of the high commissions they receive from insurers, which can be 12% or more of the invested amount.
But Mr. Neasham’s case has led some agents to think twice before offering the products.
“It’s very scary,” said Peter Langelier, an agent in Maine. “There is nothing in insurance-licensing that prepares you as a nonmedical person to diagnose dementia.”
Notice two things about this case. First, notice the sale of an illiquid annuity to an elderly investor. People save their whole lives to have liquid assets to fund the last years of their lives. Annuities lock up those assets for a decade or more and impose penalties on any investor who needs the assets to do what they were always intended to do. Do not let your elderly relatives buy one.
Second, notice that the WSJ quoted one salesman as complaining that he does not have the medical training necessary to recognize the signs of Alzheimer’s, as if such sales are unsuitable only when the client suffers from dementia. Any elderly person who fully understood such an investment would bop the salesman over the head with her walker before she’d buy one. But they don’t understand them, dementia or not. Few people do, and the salesman rarely is in that group.
But, although salesmen might think twice now, it won’t materially change the epidemic of unsuitable sales. The financial incentive is just too high. What other product allows you to take ten percent of someone’s life savings? Your elderly relatives, whether they have dementia or not, need your help avoiding these things. Please learn the ins and outs of how these products are sold so that you can step in and save the day. If you are too late to stop the sale, consider contacting knowledgeable counsel about how you can hold the salesman and his firm accountable.