Annuity Scams & Annuity Fraud To Watch Out For

Annuities are a powerful way to guarantee income during retirement. They're designed to help you feel financially secure going into your golden years, ensuring you can live your life to the fullest. Unfortunately, just like with other financial products, some scammers use annuities to make a quick buck. Even with lots of regulations to help protect consumers, annuity scams still occur.

In this article, we'll share some of the more common examples of annuity fraud and what you need to know to protect yourself.

Seniors and Annuity Fraud

Annuity fraud can happen with people at any age, but seniors are more vulnerable and, therefore, should be particularly careful.

Scammers are more likely to target them for financial abuse because:

1. They may have significant retirement savings. Fraudsters are attracted to the funds that seniors have saved over years of hard work.
2. They may be worried about their retirement plan. Scammers often take advantage of concerns that older citizens have about their financial stability.
3. They may have experienced cognitive decline. Some seniors suffer from Alzheimer’s or cognitive declines that fraudsters can prey upon.

If you're an older adult, be especially aware of scammers trying to take advantage of your retirement. And, if you're not a senior but you know retirees, ensure they're careful to stay away from financial frauds and annuity scams.

Common Types of Annuity Scams

Many state governments have strict regulations for selling annuities and this helps protect consumers. But annuity fraud and scams can still happen.

Annuity swindling typically falls into two categories. The first type is unethical behavior that still may be technically legal. It occurs when a consumer receives bad advice about annuities. This is where an agent intentionally omits important information, persuading the consumer to buy an annuity that's not right for them. Annuity agents may do this in order to make commission off of the sale.

The second type is the illegal stuff. This occurs when an insurance agent or other bad actor breaks the law to steal the consumer’s money. This happens, but it's rarer. When it happens, the consumer can seek legal recourse. Here are the most common types of annuity scams.

Selling Unsuitable Products for a Commission

What it is: Most annuity agents receive a commission for annuity sales, which incentivizes the agent to sell you an annuity. That's not a problem by itself, but it could lead them to sell you an annuity even when it’s not right for you. They may be motivated by their own bottom line and less by what’s in your best interests. This could lead them to suggest a product that's not a good fit for your needs.

How to avoid it: Choose a company with non-commissioned agents, like Canvas Annuity. That way, you know they're not motivated by their sales goals. (Plus, insurers with non-commissioned agents can provide higher interest rates!) And always make sure you understand the financial product you’re interested in. When in doubt, get an unbiased opinion from a knowledgeable friend, family member, or financial advisor.

Using High-Pressure Sales Tactics

What it is: Some sales agents may try to pressure you into buying an annuity. They could do this by scaring you about your financial future, putting you through a high-pressure sales pitch, or offering you “today-only” deals.

How to avoid it: If you recognize any of these attempts to pressure you into a sale, go somewhere else. Consider buying an annuity directly online, where you can take your time to really think through your options. You should always be given enough time to make a thoughtful decision about whether an annuity is right for you.

Intentionally Misrepresenting the Product

What it is: Some agents will purposefully pitch you an annuity contract that you can’t understand or that doesn’t mention fees. They may intentionally misrepresent the product to spur you to buy it, so they'll earn a commission.

How to avoid it: Choose companies that are transparent about their products. Ask what happens if you need access to your money before the end of the contract term. And always ask about fees: how much and when you pay them. Finally, consider choosing a company that does not pay their salespeople on commission.

Promising That You Will Never Lose Money

What it is: There are different types of annuities, and they come with different kinds of risk. Fixed annuities ensure that you get a guaranteed return, so you really won't lose money with them (assuming you keep your money in your contract for the duration of the term).

But variable annuities and indexed annuities do carry some risk because their returns are based on stock market performance. That means you could lose money in a variable annuity and, although fixed indexed annuities have a guaranteed minimum crediting rate, it’s usually set at 0% so you might not make any money if the investments you choose don't pan out. Some insurance agents aren't honest about that. They may even promise you that you'll never lose money. This is just a type of variable or indexed annuity scam.

How to avoid it: Learn about the annuity product you're interested in and understand the real risks. If you're not sure, check with a financial advisor or lawyer.

Not Disclosing Surrender Charges

What it is: If you make an early withdrawal from your annuity, expect to pay a surrender charge. Most insurers charge surrender charges if you remove money during the period known as the surrender charge period. This is a typical and expected annuity fee. However, some agents intentionally omit this information to encourage you to buy the annuity.

How to avoid it: It is normal for an annuity to have surrender charges. What’s not normal is when agents don’t disclose those charges before you buy your annuity. Before purchasing your annuity, always ask about annuity fees and charges and make sure you understand them.

Fraudulently Setting up the Annuity Contract

What it is: In one type of illegal annuity scam, agents set up the annuity contract so that they inherit the annuity when you pass away—not your beneficiaries.

How to avoid it: Always read the fine print! Before signing any contract, read it thoroughly and make sure that everything checks out. If you buy a death benefit, ensure it’s going to your chosen beneficiary. And when in doubt, check it with a lawyer.

Creating a Fake Insurance Company

What it is: Some scammers may set up a bogus insurance company and persuade you to buy an annuity from them. After you pay, they disappear with your money.

How to avoid it: Do your research. The government requires that all legitimate insurers have a license, so always ensure the company is licensed in your state. Never make out a check to an agent personally; always make it payable to the licensed company.

Tips to Protect Yourself From Annuity Fraud

Beyond the advice above for protecting yourself from individual scams, here are some other ways to keep your personal finances safe.

1. Be Skeptical of Agents Earning a Commission

These agents are incentivized to sell the product, regardless of whether it’s a good choice for you.

But some companies, like Canvas, don’t pay their agents commission. Their non-commissioned agents are available to answer any questions, and they have no incentive to pressure you into buying an unsuitable product.

2. Consult With Someone You Trust

If you’re unsure if something is a scam, ask a friend, family member, or even a lawyer. They can help you sniff out the fraud and differentiate between scams and legitimate products that could actually provide you with a stable income stream and financial stability.

3. Choose Annuities That Let You Change Your Mind

Some companies offer a 30-day free look period. So if you change your mind and decide that the annuity isn't exactly what you want, you can cancel your contract and get your money back.

Additionally, Canvas offers a Flex Fund which allows you to cancel your contract at any time. Once you cancel, you receive your initial lump-sum premium back (minus any prior withdrawals you made). Scammers and fraudsters won’t give you those options.

4. Make Sure You’re Buying From a Real Company.

Check with your state financial industry regulatory authority or FINRA for insurers writing variable annuities or check with the your State’s Insurance Department to ensure the insurance company and their product are legitimate.

We also suggest checking the company's AM Best Rating, and only doing business with companies that have a rating of "good" or better. It's also a good sign if the insurance company has a good reputation and a long history of good customer service.

5. Speak Up If Something's Wrong

If you think you are a victim or you have annuity complaints, say something. You can always contact your insurer to seek more information or lodge a complaint. You can also contact your state regulator or FINRA.

And if you think you were scammed, talk to a lawyer or the police about what to do next.

Annuity Scams: The Takeaway

Annuities are legitimate financial products that can give you a guaranteed income stream in retirement. Most agents and companies that sell life insurance and annuities, do so legitimately.

Agents that do not receive a commission are best suited to help you make financial decisions that are best for your particular financial situation. But some agents may try to sell you an unsuitable product to make a commission.

They may do that by omitting important information. Worse, but thankfully much less commonly, crooks may use complex annuity products to swindle the unsuspecting out of their retirement payouts. The best protection is education. The more you understand the annuity product you're considering, the better.

It's essential to do your research on both the issuing company and also the financial product. And always try to get independent advice from someone who won't benefit directly from your estate planning or financial decisions. That means asking friends, relatives, lawyers, or even financial advisors if you need to.

And it means being cautious of agents that earn a commission off of their sales. If you want to buy an annuity but don't want to work with a company that uses commissioned agents, check out Canvas Annuity. At Canvas, we offer annuities sold directly online.

And the best part? Because we have non-commissioned agents, our annuities have some of the highest crediting rates around! Check out our Canvas annuities products today and see how much your money can grow!