November 13, 2008

Subject: "File No. S7-14-08

To Whom It May Concern:

I would like to share my concerns about abusive marketing of index annuities. I am a CFP Practitioner and have been in the fee-only business for 26 years, and am also a member of the FPA. In addition I hold the CLU designation and have a good understanding of annuities and their proper use.

In my professional opinion, improper marketing and sales of index annuities is one of the biggest abuses for senior citizens today. My home mailbox is bombarded with offers of “free dinners” at upscale restaurants which are sponsored by insurance agents (after reading the very fine print at the bottom). The big topics are usually based on tax avoidance and other similar fear-type factors. Avoidance of market declines is another. Many tell prospects that they cannot bring an advisor or family member other than a spouse. If all of this is so good, why can it not stand the light of day? Why is it only good for those over age 55—as many brochures say? Is it because those of us over 55 are more easily misled into buying these?

We have had clients attend these and they often cannot bring out any written material, or are not given any to take with them. Requests for such material are denied and requests for sample contracts are often denied on basis that the company does not provide them. One client was offered a 10% up front bonus to the initial deposit in the proposed contract. He was also urged to put ALL of his financial assets ($800,000) into the contract so he would have $880,000 “at work”. When he inquired about withdrawing the annual living expenses of around $55,000 they then told him to borrow the entire first year’s expenses from his life insurance policies. No mention was made if incurring and paying interest on that loan, or even how it was to be repaid. That just avoided the 20% surrender penalty for first year’s withdrawals. No attention was paid to money being in a Roth IRA or regular IRA or other account. They had no interest in helping him plan except to get his money into something they could get a big commission on. They conveniently omitted that the income they promised him was based on annuitizing the contract. We pointed this out and he steadfastly said that they told him it was not an annuity. Finally upon confrontation, they admitted that it was annuitizing the entire contract which is not what he wanted. He was totally deceived, believing that they would protect him from stock market losses, reduce his taxes, and return his principal. They did not tell him that all payments out had some ordinary income component and that any growth would be taxed at ordinary income rates, not capital gain rates.

I could go on and on about the misleading practices. Most reputable agents that we refer clients to for insurance refuse to sell these as they have such a bad reputation and are very difficult for a professional to understand, let alone a senior citizen who is easily deceived. I believe these products should be banned. At the least, commissions on them should be limited to 2%, the same as for many investment products. Many pay 10% or more which is unconscionable, especially since they will must have a 15 to 20 year surrender charge period and a 15 to 20% surrender charge to cover the bonus and high commission costs. Only a salesman wanting easy commissions can argue for such a grossly unconscionable product.

States are not doing an adequate job of policing the sale of these products. If they were, these abuses would not occur. Many of the sales persons are not well educated in financial matters and are not advising clients of the pitfalls of these products. Requirements for sale of them should be the same as for sale of investments, for that is what they are. They are sold as “investments without the risk”. The old adage “if it walks like a duck…” certainly applies to these products which claim to have the benefits of investments, but “are not”.

Please do the American senior citizen a favor and implement the Equity-indexed Annuity Rule. I am sure you will be bombarded by insurance agents and their companies taking the opposite position, but protection of the public is the most important thing.

Sincerely,

John W. Ueleke, CFP®
President
www.legacywealth.com