Protecting seniors from investing peril

Congress wants to help protect elders who purchase complex investment funds products that they don’t realize or may do more than harm than good.

A little-noticed proposition would set aside $8 million for States that bulk up oversight. It was buried last week in a 1,136-page Senate bill to reshape the financial system. A House bill contains a similar proposal.

States could get as much as $500,000 apiece to investigate and prosecute fraud against seniors, but only if they agree to strengthen their laws to match national consumer protection standards.

“You’re dealing with situations that are very tough to apply,” said Sean Dilweg, the Wisconsin insurance commissioner. “It’s so important to have good standards.”

The legislative speech mostly points annuities – contracts in which clients pay a lump sum upfront in exchange for monthly income over time.

As the financial crisis has wreaked havoc on nest eggs, more than retirees have turned to annuities and other life insurance policy products as alternatives to stocks.

Yearly sales of fixed annuities accumulated 50% in 2008 to $109.3 billion, according to the insurance policy Information Institute. (In fixed annuities, customers give a lump sum and get income set at a fixed interest rate over a specific period of time.)

While many types of life insurance policy and annuities can be useful for seniors, they can also be complex. And the number of seniors getting ensnared in products they don’t realize is on the rise, consumer watchdogs say.

“The policyholder has to become an expert to ever get the message,” told Joseph Belth, an insurance policy professor emeritus at the Indiana University Kelley School of Business. “In the case of some annuities, the people selling them do not understand them, let alone the people buying them.”

Confusion and sometimes fraud

Problems often arise when seniors don’t realize what they have bought.

That happened to George Adam of Lake Placid, Fla.

Adam and his wife, Jeanne, cashed in $57,000 in an IRA fund and bought variable annuities tied to the mutual fund PBHG Funds. When the founders of that fund were filed with fake, the fund tanked. And George and Jeanne Adam lost it all.

“I had no idea what an annuity was. I didn’t know I had purchased them. I didn’t know they weren’t guaranteed,” told George Adam, 73. “And I didn’t know the man who came to our door was actually an insurance salesman.”

Some annuities come with high fees if the purchaser withdraws his underlying investment funds before a certain period of time has lapsed.

Dilweg, the Wisconsin regulator, recently reversed the license of a life insurance agent from Two Rivers, Wis. The agent had tied up most of an 88-year-old customer’s nest egg – some $450,000 – in annuities that filed up to 25% of her investment if she withdrew money in the first 15 years.

In another recent case, a North Carolina man was charged with allegedly embezzling $2.6 million. Charles Mark Hall, 50, of Smithfield, N.C., is charged with, among other things, selling three annuities worth $168,000 to a 90-year-old woman and then convincing her to resignation the investment funds to him, according to the North Carolina Office of insurance policy. His attorney declined to comment on his case but said he’s working with investigators.

Stronger oversight

State and federal officials have already come out looking into how they can strengthen oversight of annuities, but regulation is patchwork state by state.

Fixed and equity-indexed annuities are regulated by state insurance policy agencies. The Securities and Exchange Commission regulates variable annuities, which are considered securities. The SEC is trying to wrestle oversight of equity-indexed annuities away from the Nations, but that effort is stuck in court.

To crack down on bad actors, officials want to establish clear definitions of sales practices suitable for elders.

The Senate push is being led by Sen. Herb Kohl, D-Wis., chairman of the Special Committee on Aging. Kohl wants to create a tough national standard and use the federal grants as a carrot to States that meet them.

But the American Council of Life Insurers, which represents 95% of annuities issuers, doesn’t like the standard Kohl is advocating.

The lobbying group generally endorses the idea of allowing consumers with more than information but would prefer going about it in a different way.

“It seems like what he’s attempting to do is going to set too high a bar for the Nations to cross,” said Jack Dolan, spokesman for the insurance group.

Despite the push back, the proposed tougher oversight of annuities is poised to make a big leap forward because it’s catching a ride on high-profile regulatory reform legislation – a top precedence for the Obama government.

The House Financial Services Committee approved a version of the legislation previous this month, and the Senate will start considering it later this week.cnnmoney