The Investment Scientist

How an Insurance Company Misleads Its Annuity Customers

Posted on: May 30, 2011

I was called a “wing nut” by a commenter for pointing out all the malpractices of insurance companies. Indeed, I could go nuts seeing how they mislead their customers into financial peril. They know full well that their customers are not going to read beyond the first few pages of their hundred-page contract, so they put all the goodies on the first page and keep the disclaimers on the back pages.

The following is an actual annuity contract a client of mine purchased a few years ago, much to his regret now.

On the first page of the contract, all the warm and fuzzy keywords are used: “GUARANTEE”, “fixed”, “annualized interest rate of 5.75%”. Pay attention to the following line though: This rate is subject to change each month.

Annuity Contract Front Page

Annuity Contract Front Page

Many pages later, the truth is about to be revealed …

Annuity Contract Inside Page

Annuity Contract Inside Page

The actual Minimum Guaranteed Interest Rate is only 1.75%! Why they don’t disclose it on the front page? Is it not bordering on lying?

Annuity Contract Inside Page Close Up

Annuity Contract Inside Page Close Up

Examples like this are abundant, so buyers beware! If you have to buy annuities or life insurance, read the whole contract, line by line.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

7 Responses to "How an Insurance Company Misleads Its Annuity Customers"


I am Amy Lewis, a Content writer. I have checked your blog and found some quite interesting articles on finance with lot of information. I would be really thankful, if you allow me to do relevant informative guest post in your blog. I would like to contribute an informative and relevant article for your blog without charging you a penny 🙂

Thanks for bringing this to our attention!

The article title is problematic, Michael. You have a specific complaint about a subclass of the annuity market, and it’s a legitimate complaint, but to paint the whole insurance industry with a broad brush is misleading to your readers. 🙂

Simple fixed annuities (although oversold) are a different animal than VAs, and term life is a valuable product; not to mention the differences between Life/Health and P&C insurance like auto, home, business owners, commercial proerty, etc.

Yes, the majority of the VAs and indexed annuities are garbage, and the contracts are intentionally complex. I would argue my unprofessionaly opinion that essentially nobody is a good candidate for them.

I would even argue that very few people are good candidates for simple annuities or whole/universal life policies; to me the value of these products is in tax advantage and judgment protection, both of which only apply to a limited customer base. People not in that customer base are better off investing directly in what the annuity provider would have invested in (given a vanilla product), or better yet, in buying the annuity providers’ debt on the open market in a laddered bond portfolio.

Just an opinion, not necessarily representative of that of any past, current, or future employer, and I’m not a registered anything so this is not “advice.”

Bill, thank you for your comment. I will think about it carefully.

Bill, I changed to title to reflect your concern. Now it is “How a insurance company …” not “How insurance companies …” though from my experience this is by no mean an isolated incidence.

At the risk of being pesky, might I suggest a better title would be SPECIFIC to ANNUITIES.

Certainly I don’t think this is an isolated incident … in the ANNUITY space.

Oh, thought you’d enjoy this article, it’s related.

Click to access Fantasy-world_Returns_for_Equity_Indexed_Annuities.pdf

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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