JESSICA GRIFFIN / Staff Photographer
Fixed index annuities
High-profile fixed index annuities salesman Phillip J. Cannella 3rd at one the free dinners he hosts across the region to promote his company. Cannella, who also hosts an hour-long paid radio infomercial every Saturday and Sunday, says his firm writes $100 million in contracts annually, earning $6 to $8 million in commissions.
As sales of the insurance product soar, regulation remains lax, and experts urge caution, especially by the elderly. Trump could halt a rule aimed at putting clients first.
Mark Fazlollah / Staff Writer, [emailÂ protected]
Erin Arvedlund / Staff Writer, [emailÂ protected]
March 5, 2017
That night, like most nights, Phillip J. Cannella 3rd warned that the financial world was at the brink of a massive meltdown, one that would wipe out savings and crush retirees.
âWeâre about to enter a horrible period, crash followed by recovery, followed by inflation,â the insurance agent said last fall, pacing excitedly in front of nearly 100 retirees and middle-aged guests at the Springfield Country Club, enticed by the promise of a free dinner.
When he asked for a show of hands of who lost money in the 2008 financial crash, about half raised theirs. âIt’s going to be a world collapse, economically speaking,â Cannella warned them. âYou need to plan for this storm coming. You need to be in a vehicle that’s not going to sink when Wall Street sinks.â
If Wall Street is the problem, Cannella believes he has the solution: fixed index annuities, a popular but complex insurance product known for lucrative commissions and opaque fees.
Sales of these lightly regulated investments have surged since the 2008 financial crash, when mom-and-pop investors saw the stocks and mutual funds they counted on for retirement plummet in value. Seizing opportunity, insurance agents began pitching these annuities on cable TV and radio infomercials, telling seniors how to protect their savings with investments reassuringly described as ârisk freeâ and âno fee.â
JESSICA GRIFFIN / Staff Photographer
At a free dinner to promote fixed index annuities, Phillip J. Cannella 3rd asks for a show of hands to illustrate how many lost money in the 2008 market crash. His spiel includes warnings of economic collapse, but he leaves out key information to prove his product is safer than stocks and mutual funds.
But in Pennsylvania and most states, sales agents arenât required to disclose their commissions, typically 6 to 10 percent, that insurance carriers pay them for putting retirees’ money into these long-term investments. Seniors also can face huge penalties for early withdrawals for unexpected medical bills or other emergencies.
California Insurance Commissioner Dave Jones, who oversees the nation’s biggest insurance market, urged caution: âWeâve seen people being sold annuities that are entirely unsuitable because of their age, because of their financial circumstances. … It’s an area of increasing complexity, a population that is extremely vulnerable, and one in which there is a lot of room for mischief.â
âIt’s an area of increasing complexity, a population that is extremely vulnerable and one in which there is a lot of room for mischief.â
Dave Jones, California Insurance Commissioner
The U.S. Department of Labor, which has oversight of retirement plans, became alarmed about insurance agents and investment brokers pushing clients into inappropriate retirement investments with high or undisclosed commissions. These practices, it estimated, cost retirees $17 billion a year in excess fees.
The department crafted a regulation, set to take effect in April, that would require financial advisers to put their clients’ interests first when selling investments for retirement. Known as the âfiduciary rule,â it was the first federal regulation of insurance agents, including some of the 230,000 in Pennsylvania.
With its potential for curtailing high-commission insurance sales, Cannella said, the rule was âgoing to knock out halfâ of the agents selling annuities.
But in February, President Trump, by an executive order, halted the long-debated regulatory change and called for another review. The insurance and investment industry had fought the new rule for years and hope the new administration can kill the Obama-era reform.
If so, sales of insurance products will remain overseen primarily by state regulators, unlike sales of stocks and mutual funds, which have some federal consumer protections.
In Pennsylvania, investors have poured billions of dollars into fixed index annuities over the last decade just as the state Insurance Department has been slashing its staff. It has 225 employees, slightly more than half its 2006 workforce of 414.
Fewer regulators for a growing market
The number of employees at the Pennsylvania Insurance Department fell from 414 in 2006 to 199 in 2016. As a rate per premiums sold, the state has fewer than half the regulators than the national average.
Insurance department employees per $1 billion in premiums
SOURCE: National Association of Insurance Commissioners
GARLAND POTTS / Staff
Meanwhile, staffers in the department who look into consumer complaints have been saddled with the highest annual caseloads in the nation. In 2014, each consumer staffer on average had 655 complaints — more than three times the national average, according to an Inquirer analysis of insurance-industry data. (Their New Jersey counterparts had a caseload of 163.)
Asked whether the department could keep up with its thousands of annual consumer complaints, spokesman Ronald G. Ruman said the agency has enough staff to be âfully able to do the job needed to enforce our laws and protect Pennsylvania consumers.â
Q: What is an annuity?
An annuity is a contract between you and an insurance company–a contract that promises to pay you a certain amount of money over a specified time. Social Security is one example of an annuity that pays retirees steady cash flow in retirement.
Typically, retirees who wish to guarantee a minimum income stream during their retirement years may purchase annuities.
Q: What should I look out for when buying an annuity?
Commissions & Fees
Agents typically reap commission of 6% or more, depending on the contract. So on a $100,000 annuity the agent makes $6,000. Annuities can lock up your money for a decade or longer, and if you cash out early, you may pay a “surrender charge” of between 10 to 22 percent. That means on a $100,000 annuity, if you cash out early, you could pay a penalty of $10,000 to $22,000, not including commissions. Surrender charges decline the longer you leave in your money.
Q: Who should buy an annuity?
For those who have no pension or want a supplement, annuities can provide income, help avoid overspending and provide a floor of guaranteed money. Annuities may be inappropriate or too expensive for people who have shorter-than-normal life expectancies. The elderly, who may not outlive these insurance contracts, should likely avoid annuities.
Do-it-yourself retirement planning
Consumer protection for seniors has become all the more important because of a tectonic shift in how Americans prepare for their retirement. Today, old-standby pension plans â in which the employer provides a fixed monthly payout for life â are offered by only 5 percent of Fortune 500 companies, down from 50 percent in 1998, according to a recent study.
Guides and more information from state and federal government agencies: