Video: Annuities aren't right for everyone

By Lea Thompson Chief consumer correspondent
NBC News
updated 8/31/2006 7:23:43 PM ET 2006-08-31T23:23:43

As interest rates on savings stay low, more and more people are intrigued by the seemingly good return on annuities. In fact, in the last 10 years, annuities sales have skyrocketed — from $77 billion in 1995 to $167 billion last year. But, buying an annuity can be a complicated and tricky business, and fraud by unscrupulous or uneducated salespeople is a serious and rising problem.

All Ernie Hammermueller wanted to do was get a better return on his retirement money. So when a guy invited to talk about investing and financing convinced Ernie — who has dementia — to spend his life savings to buy annuities, he did. About $600,000 worth.

"He said, 'Oh I can get you a much much better return on your money,' so I fell for it and made out a check," Hammermueller says.

Instead of a life insurance policy that rewards your family when you die, annuities can give you a continuous revenue stream while you are still living. For some, they can make sense as part of a retirement plan. But you have to plunk down a huge amount up front, and annuities take years to mature.

Shortly after Hammermueller bought the policies, his wife got sick. That's when he discovered his policies wouldn't mature until he was 100 years old. And if he took money out early, he would pay a 22 percent penalty. Hammermueller plunged into debt.

"I was just desperate and was looking for help," he says. "It was a terrible time."

"They are tough investments for a lot of people, they're very complicated, they’re often sold to the wrong people for the wrong reasons," says Amanda Walker with Consumer Reports.

Consumer advocates warn that many agents selling annuities don't really know much about them, but they do know they can make big money. Hammermueller's agent made almost $79,000.

"It's a commission-driven business," says Barry Lanier, a Florida insurance investigator. "No sale, you get no paycheck." 

Lanier says the deceptive sale of annuities is now a leading fraud in Florida.

And while many states have started to rein in salespeople, 10 states have no provisions whatsoever to regulate annuities sales. Insurance commissioners agree, until the industry lowers commissions and cracks down on agents, annuity fraud will continue to rise.

As for Hammermueller, the insurance company gave him his money back and says it made a mistake in allowing the agent to sell him the annuities.

But Hammermueller still sued under a California senior fraud law. The jury was so angry it awarded him a whopping $18.5 million. The company wants a new trial though, so at 87, Hammermueller may not live long enough to collect the jury's award.

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