Recourse may be available if you've been financially victimized

In last week's column, we discussed ways in which consumers, and particularly seniors, can protect themselves from becoming the unwitting victims of unscrupulous insurance agents, financial advisers, or securities salespersons.

Here are some of the most often encountered abusive sales practices:

1. Regarding the sales of variable annuities or variable life insurance policies, the problem areas include: Sec. 1035 exchanges (exchanging one annuity for another); sales of variable annuities inside a qualified plan (this would be tantamount to selling a tax shelter within a tax shelter); improper or non-existent disclosure of costs and fees; comparing the subaccounts of these products to mutual funds; as well as the use of unrealistic sales projections.

2. The sale of a life insurance policy as an investment, or as a retirement vehicle can cause problems. Actually, the sale of life insurance as an investment class may make sense, since a permanent policy from a top carrier will usually generate a competitive internal rate of return on death (comparing the death benefit to premiums paid) versus other fixed dollar investments. Then too, the cash values that accumulate in a permanent life insurance policy can provide a stream of tax-free income in retirement, but the abuse comes in when unscrupulous agents illustrate overly aggressive rates of return in the cash values.

3. Churning of life insurance policies has been around for years, and in this scam, the agent approaches a person with a cash rich in-force policy, and the hook is usually "free insurance." What actually transpires is that a new policy is sold, and the premiums are paid from either surrendering the older policy for its cash values to pay premiums, or the dividends from the old policy are used for this purpose.

4. Fixed annuities can be a valuable addition to one's retirement or investment portfolio for those individuals who don't need a source of emergency funds. Fixed annuities are usually purchased with a single premium and often credit greater interest rates than are available in other fixed dollar investments. As such, they provide value to consumers. However, the rub comes in when agents fail to disclose to prospects that all annuities contain graded surrender penalties. As a consequence, if a buyer ever had to take all of the monies out of the annuity policy, he would be hit with these deferred charges. A failure by an agent to discuss these surrender charges up front would be grounds for the issuing company to refund your money, perhaps with interest.

5. The final area of potential abuse is in the sale of equity-indexed annuities. In my view, these products should be sold only by registered representatives of broker-dealers, and, thus, subject to on-site supervision, which largely eliminates any sales abuses. However, legislation to require such registration was defeated earlier this year, so the only supervision now is provided by the home office of the insurance company. Several years ago, the State of Minnesota settled a lawsuit against Allianz Life Insurance Company, one of the nation's largest sellers of equity-indexed annuities, over charges that it sold deferred EIA's which were unsuitable for seniors, and Allianz agreed to alter its sales practices. Since these products are so complicated, it pays to ask questions and get everything in writing for your files. Make certain you understand what you are buying.

If you believe that you have been wronged, the first line of defense is to telephone the issuing life insurance company and speak to their compliance department. Tell them what occurred (or didn't occur.) during the sales process, and you may want to request a refund of all of your premiums. If you are not satisfied with the company's response, the next step is to contact the South Carolina Department of Insurance at (803) 737-3467, and they may be able to help. In the vast majority of cases, you should get relief from one of these two sources, but if you don't, I recommend speaking with a financial adviser or attorney who has experience in these matters.

Got a financial planning question for Greg? You may e-mail him at greg29803@gmail.com.

Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.