It’s a fate you wouldn’t wish on anyone, much less your grandmother, but people like Bonnie Madden fall victim to life insurance scams every day.
Madden, 82, of Port Richey, Fla., liquidated her existing investments to purchase two annuities which could not be cashed out for 10 and 15 years respectively without paying a severe financial penalty. The 2006 transactions generated $52,355 in commissions for her insurance agent. But Madden was unable to pay the premium on her inflated policy and would have lost nearly $300,000 of her life savings if state regulators had not arrested the agent and recovered her money.
Florida regulators say her agent engaged in a practice known as "twisting" when he falsely inflated Madden's net worth and converted her existing annuities into one annuity policy with a different company in order to generate his commission.
Life insurance scams such as the one inflicted on Madden are sweeping the nation as state regulators report tens of thousands of complaints from consumers. Particularly vulnerable are seniors who may have lost some of their nest eggs in the economic downturn and are prey to unscrupulous insurance agents who promise to make them whole.
(Don’t miss this MainStreet story about four life insurance myths.)
Florida’s Chief Finance Officer Alex Sink said the number of complaints from Florida seniors about annuity sales has nearly quadrupled in the past three years. Sink said investigators have opened nearly 500 administrative cases on financial fraud involving seniors, with approximately 70% of cases related to annuity and life insurance transactions.
“While the majority of annuities are sold by professionals, some predatory agents are misrepresenting investments to our seniors and selling products that are completely unsuitable for older Floridians,’’ said Sink.
Sometimes, regulators are finding the insurance company at fault.
In 2008, California insurance regulators negotiated a settlement of more than $10 million with the Allianz Life Insurance Co. of North America after they accused the company of using false marketing tools to sell annuity contracts to seniors that were clearly unsuitable for the needs of the customer.
The company admitted no wrongdoing as part of the settlement agreement.
One of the practices, known as “churning” was to replace existing annuity contracts of seniors over the age of 80 with promises of “immediate” bonuses that were never received, said California Insurance Commissioner Steve Poizner.
Annuities can provide guaranteed monthly payments for people who want a cash flow during retirement, but they are generally not recommended for seniors older than 60 because the payment is locked up for up to 15 years. Seniors needing access to cash before that period would pay huge penalty or surrender fees.
Stranger-Oriented Life Insurance
Stranger-Oriented Life Insurance is another emerging area of insurance fraud targeting seniors. In the stranger-oriented life insurance transaction, an elderly person purchases a life insurance policy with the intent to sell it to a hedge fund or other investors following a two-year waiting period.
Settlement companies act as intermediaries between the purchaser and the investors. The purchaser receives a fee for being a part of the transaction.
Stranger-oriented life insurance transactions are considered legal in some states, but illegal in others. Regardless of the legal status, the life insurance industry has started aggressively suing seniors who take part in the practice. They say policies can’t be sold and to do so intentionally is a violation of the purchase agreement.
There are also other issues. Seniors who participate in these transaction risk being barred from buying additional policies that they might need. There is also the issue of taxes. Money received from the sale of a life insurance policy is taxable, but reporting it puts the senior on record as receiving a profit from the sale of their life insurance. Of course, if the senior doesn’t report it, they could be charged with tax fraud.
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