An “indexed annuity” is a complex, high-cost, and illiquid financial product. They pay interest based on the performance of stock and bond market indexes. Insurers guarantee buyers will not lose their principal, but they require investors to lock-up their capital for long periods, often more than a decade.
Indexed annuities are very popular with insurance salespeople because they are a high commission product. Insurance agents can get an up-front payoff of 12% or more of the invested amount simply by making the sale. The accompanying chart demonstrates the sales of indexed annuities have surged in the past decade.
Investor protection agencies and authorities are very concerned about abuse and fraudulent activity around annuities sales. Former California insurance commissioner Steve Pozner warned that agents “who steal from vulnerable seniors will not get away with their shameful tricks.”
In February, an insurance agent named Glenn Neasham 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 allegedly showed signs of dementia. Should the policy holder need to access her invested principal in the first few years of the policy, to meet medical expenses for instance, she would be hit with surrender charges – 12.5% of the principal amount during the first year, according to Allianz, the issuer of the policy.
Insurance agent Glenn Neasham once enjoyed an annual income of $500,000 from selling products such as indexed annuities but now seeks donations to pay his legal fees.