How to Spot a Scam When Shopping for Annuities

Most annuity transactions are legitimate.

But like every financial industry, there are bad actors, misleading sales practices, and situations where the recommendation may benefit the salesperson more than the buyer.

Some warning signs are obvious.

Others are harder to spot because the product itself may be legitimate while the way it is being sold is questionable.

That is why understanding how an annuity transaction should work is so important.

Key Takeaways

• Money used to purchase an annuity should go directly to the issuing insurance company.
• Never make an annuity purchase check payable to the agent or the agent's business.
• Annuities are approved and regulated at the state level.
• Repeatedly replacing annuities before surrender periods end can be a major warning sign.
• Large bonuses and market-like return promises should not determine which annuity you buy.
• Always review and keep a copy of the annuity application before the contract is submitted.

Never Make the Check Payable to the Agent

One of the clearest warning signs is an agent asking you to make the annuity purchase check payable directly to them.

That is not how an annuity purchase should work.

Money should go directly to the life insurance company issuing the contract.

The funds should not need to pass through:

• the agent
• the advisor's personal account
• the agency's bank account
• the agent's office

The agent facilitates the transaction.

The insurance company receives the premium and issues the contract.

Where Should Your Money Go?

If you are purchasing an annuity using cash or other non-qualified funds, the money generally moves directly from your financial institution to the issuing insurer.

For example:

Bank → Life insurance company

or:

Brokerage account → Life insurance company

That separation is important.

If someone tells you to send the money somewhere else first, stop and verify what is happening.

Verify That the Carrier and Product Are Approved

Annuities are regulated at the state level.

Insurance companies and specific annuity products need to be approved for sale in the state where the transaction takes place.

If you have never heard of the company or something about the recommendation feels unusual, verify it.

You can contact your state's insurance department and confirm whether the carrier and product are approved for sale there.

State Regulation Matters

Each state has an insurance regulator responsible for overseeing insurance products and licensed insurance professionals.

That gives consumers another place to verify:

• the insurance company
• the agent's license
• whether the product can legally be sold in the state
• disciplinary information when available

Do not rely solely on what the salesperson tells you.

Watch for Repeated Annuity Replacements

Another major warning sign is repeatedly moving from one annuity to another.

For example, an agent may sell you a Fixed Index Annuity with a long surrender period.

Two or three years later, the same person may return and say they found a better annuity.

The recommendation might involve surrendering the old contract, paying or absorbing surrender charges, and moving into another product with a new surrender period.

That deserves serious scrutiny.

What Is Churning or Twisting?

Repeated transactions designed primarily to generate additional commissions can be referred to as churning or twisting depending on the circumstances and regulatory context.

The problem is that each replacement can:

• restart surrender periods
• create new restrictions
• trigger surrender charges
• generate another commission
• leave the client continuously locked into long-term contracts

A replacement should make sense for you, not simply create another transaction.

Ask Why the Existing Contract Needs to Be Replaced

If someone recommends replacing an annuity you already own, ask:

• What specific contractual improvement am I receiving?
• What surrender charge will I pay?
• How long is the new surrender period?
• What guarantee am I giving up?
• What guarantee am I gaining?
• How much commission is generated by the new transaction?

The answer should clearly demonstrate why the replacement benefits you.

Be Careful With Upfront Bonuses

Large annuity bonuses can be powerful sales tools.

But a bonus is not free money.

It is part of the overall economics of the contract.

A large bonus may apply to:

• an Income Rider benefit base
• a contractual calculation
• another value defined by the policy

It may not be immediately available cash.

Do not choose an annuity simply because the headline bonus is bigger.

A Bonus Should Not Cover Up a Bad Replacement

Be especially cautious if someone says a new annuity's bonus will "make up for" the surrender charge on your existing contract.

That can sound attractive.

But you need to understand where the bonus is actually credited and whether it truly compensates you economically for what you are giving up.

The comparison should be made using the entire contract.

Watch for Market Upside With No Downside

Another warning sign is a presentation that makes an annuity sound like a perfect market investment.

You may hear phrases such as:

• market upside with no downside
• market participation with principal protection
• stock market returns without stock market risk
• high historical returns with no losses

Fixed Index Annuities are not direct stock market investments.

They are fixed insurance contracts.

Fixed Index Annuities Were Not Designed for Full Market Returns

A Fixed Index Annuity uses an external index as part of its interest-crediting formula.

You are not directly invested in the index.

Potential interest can be limited through:

• caps
• spreads
• participation rates
• other crediting provisions

Future indexed returns are not guaranteed.

If the recommendation depends on hypothetical market-like performance, understand exactly what the contract guarantees instead.

Back-Tested Returns Are Not Contractual Returns

A sales presentation may show how an index strategy would have performed historically.

That can look impressive.

But back-tested results are not contractual guarantees.

The future can be different.

Crediting terms can also change according to the contract.

Do not build a retirement plan around a number the insurance company is not contractually promising.

Fixed Index Annuities Are Not Automatically Bad Products

The problem is not necessarily the product.

It is often how the product is sold.

A Fixed Index Annuity can be an efficient delivery system for an Income Rider.

If the objective is guaranteed lifetime income in the future, compare the contractual Income Rider guarantee.

Do not let hypothetical index performance become the reason for purchasing the contract.

Be Careful With "Free Long-Term Care"

Annuities may include confinement or nursing home-related benefits.

That is not automatically the same thing as traditional long-term care insurance.

Traditional long-term care insurance is a health insurance product.

An annuity is a life insurance product.

If someone says the annuity includes "free long-term care," ask exactly what the contract provides.

Understand the Benefit Trigger

If an annuity contains a care-related rider, determine:

• what triggers the benefit
• how much additional money becomes available
• how long the benefit lasts
• whether it depends on remaining contract value
• whether there is an additional fee
• whether it is actually long-term care insurance

The marketing label should not replace the contractual language.

Be Cautious With Roth Conversion Sales Pitches

You do not need an annuity to complete a Roth conversion.

A Roth conversion is a retirement-account and tax decision.

If someone tells you that you need to buy a Fixed Index Annuity in order to convert traditional IRA money into a Roth IRA, be cautious.

The annuity decision and the Roth conversion decision should each make sense independently.

Repeated Transactions Can Generate Repeated Commissions

If an agent recommends buying an annuity, converting accounts, replacing the annuity, and purchasing another product, understand how many transactions are taking place.

Each one may generate compensation.

That does not automatically make the strategy wrong.

But you should understand why every transaction is necessary.

Simple Products Are Easier to Verify

Some annuity products are relatively straightforward.

Examples include:

• MYGAs
• Single Premium Immediate Annuities
• Deferred Income Annuities
• QLACs

Their contractual guarantees can generally be explained clearly.

The more complicated the recommendation becomes, the more important it is to separate what is guaranteed from what is hypothetical.

Buy Contractual Guarantees

An annuity is a contract.

That means the most important question is what the issuing insurance company is actually guaranteeing.

Do not make the purchase primarily because of:

• hypothetical returns
• theoretical projections
• back-tested performance
• large bonuses
• complicated illustrations

Focus on the contractual result.

Trust Your Instincts

If something sounds too good to be true, investigate it.

Annuities are not magical products.

There is no secret contract available only to the people attending one dinner seminar.

There is no guaranteed way to receive full market returns without market risk.

If a presentation sounds unusually perfect, slow down.

Do Not Let a Free Dinner Rush the Decision

Dinner seminars are a common way annuities are marketed.

There is nothing inherently wrong with attending one.

But eating an expensive steak does not mean you owe anyone a financial transaction.

Take the information home.

Research the product.

Compare other carriers.

Read the contract.

There should be no pressure to make a decision immediately.

Always Get a Copy of the Application

Before an annuity application is submitted, review it.

Make sure the information is accurate.

Then keep a copy.

That includes reviewing information such as:

• income
• net worth
• liquid assets
• source of funds
• existing annuities
• beneficiary information
• suitability information

Do not sign an application containing numbers you know are incorrect.

Verify Your Financial Information

Insurance companies use financial information as part of their suitability review.

If an agent inflates your income, net worth, or liquid assets so that a larger annuity purchase can be approved, that is a serious problem.

Your application should reflect your actual financial situation.

Never allow someone to falsify the numbers simply to get a transaction through.

Do Not Put Too Much of Your Money Into Annuities

An annuity should solve a specific contractual need.

You generally should not put every investable dollar into annuity contracts.

You still need assets available for:

• liquidity
• emergencies
• market growth
• discretionary spending
• other financial goals

Use the amount necessary to solve the contractual problem.

Ask Two Questions Before Buying

Before considering any annuity, ask:

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

Those questions make it easier to identify whether the product being recommended actually fits your situation.

Compare Multiple Carriers

Annuities are commodity products.

One insurance company is not always the best.

If the recommendation is legitimate, it should stand up against competing carriers.

For lifetime income, compare contractual payouts.

For guaranteed accumulation, compare MYGA rates and terms.

Do not rely on a one-product sales presentation.

Where to Compare Annuities

If you're ready to compare quotes, use our annuity calculators to evaluate current contractual guarantees from multiple insurance companies.

Seeing the actual guarantees makes it easier to recognize when a sales pitch is relying too heavily on bonuses, projections, or hypothetical returns.

The Bottom Line

The clearest annuity scams involve money being sent somewhere it should never go, unapproved products, falsified applications, or transactions that exist primarily to generate another commission.

Other warning signs are less obvious.

Repeated replacements, large bonuses, market-like return promises, "free" benefits, and complicated hypothetical illustrations should all make you slow down and look at the contract.

Your money should go directly to the issuing insurance company, your application should contain accurate information, and the annuity should solve a specific contractual need.

If the recommendation only looks attractive because of what might happen, keep shopping.

‍