No 75-year-old retiree should drop his or her life savings into an annuity that imposes a 10-year wait before the first payment.
Indiana regulators understand this basic investment rule, and they want to ensure that the people who sell annuities follow it as well.
The state Department of Insurance now places the burden of deciding whether an annuity is right for a consumer over age 65 on the seller, thanks to a new rule that started July 1. It requires the seller to gather certain information from the customer-like their tax bracket, savings and investment objectives-keep a record of what they collected and then make the decision on the product.
If agents sell improper annuities, they might be forced to return money or waive surrender fees when customers need to make a withdrawal. In extreme cases, the department can levy fines, or suspend or revoke licenses.
"The goal of the regulation is really to make sure the purchase is suitable for that senior consumer," said Amy Strati, the insurance department's chief counsel.
Regulators decided to nose into the state's $4 billion market for annuities after hearing complaints from constituents about products sold to customers who couldn't wait for the eventual payment, State Insurance Commissioner Jim Atterholt said.
The rule, passed last year, was modeled after boilerplate regulatory language devised by the Kansas City, Mo.-based National Association of Insurance Commissioners.
"The real key to the regulation is to make sure the agent is selecting the information to see what differences there are between consumers and making sure they're selecting an annuity that suits their needs," Strati said, noting that no "black-and-white answer" defines suitability for everyone.
The insurance department picked a hot field to delve into-and one that could use some oversight, according to investment experts.
Annuities are contracts that provide income for life or a certain number of years in exchange for a premium payment or payments. Some produce payments within a year, but deferred annuities push income payments several years down the road.
These investment vehicles have become so popular that more than half of all premiums received by U.S. life insurance companies now go toward annuities instead of life insurance, according to Dr. Steven Weisbart, an economist with the New York-based Insurance Information Institute.
He said the popularity of annuities is driven by the retiring Baby Boomer generation and a decline in defined benefit pensions, which forces people to assume more responsibility for their own retirement income.
Some also get hooked on the return guarantees that certain annuities offer.
"The idea that you have an investment that cannot go down no matter what the market does or interest rates do is very appealing to people," he said.
Of course, annuities also come with drawbacks. They can be more expensive than mutual funds and some stipulate hefty surrender fees if the customer wants to withdraw money prematurely. This can lead to complaints, especially if the consumer doesn't fully understand the contract before signing it.
Such complaints have spawned regulatory action nationwide. Last year, California regulators filed a lawsuit against a living trust mill they accused of tricking retirees into improper annuity investment. That case, which is still pending, seeks $110 million in civil penalties, restitution and damages.
Variable annuities rank third behind mutual funds and common stock in complaints received by the National Association of Securities Dealers, according to spokesman Herb Perone.
That high ranking "is way out of proportion to their share of the marketplace," he said, noting that variable annuities are the only kind his association has jurisdiction over.
Perone's association has asked the U.S. Securities and Exchange Commission to raise disclosure and suitability requirements for these annuities.
"We want to make sure there's full disclosure of the costs, that a thorough analysis has been done so it's suitable for the investor," he said.
A total of 10 states have adopted suitability standards for elderly annuity purchasers like Indiana's, said Tom Zurek, general counsel for Indianapolisbased One America Financial Partners Inc. An additional seven have adopted standards that apply to all consumers, not just the elderly.
Indiana's suitability standards will expand to cover all ages, possibly as soon as next year, Atterholt said.
The new measure received a good review from AARP Indiana official Irene Wegner, who knows of two "heartbreaking" cases-one involving an octogenarian-where a trusted insurance agent engineered a switch from mutual funds to annuities that tied up the customers' savings.
Wegner said some sellers invite seniors to free lunches or seminars. Then they pressure them to buy a product so the seller can land a big commission.
"Quite often, they get all of your financial information, and then they say, 'Well, you'd be better off with an annuity,'" she said. "That isn't always the case."
She said people considering annuities should avoid being pressured into making a decision quickly. They also need to accept some responsibility for protecting themselves.
"Consumers still need to be watchful, still need to have responsibility ... and they have to do their homework," she said. "The state can't protect them on everything."
Indeed, Atterholt encourages consumers to ask plenty of questions about things like surrender fees, partial withdraws and premium payments.
If the consumer has a complaint about an annuity, they can always report it to the insurance department, which can then audit the records of a company or agent. But Atterholt added that the new measure shouldn't come across as "anti-annuity."
He noted that problems with these products rarely stem from "the well-established players in the industry.
"All we're really trying to do is encourage consumers to be well-informed and to encourage producers or agents to use appropriate sales practices," he said. "We actually see the annuity business as a wonderful growth industry for Indiana.
"Some of the major players in our state are shifting in that direction."