Discussion:Financial planning question - Borrowing home equity to buy annuity

These folks are 60+. They already had sufficient income to meet their expenses. So I can't figure out how this could be a good financial planning idea. Surely the annuity's return cannot possibly out earn the interest on their new variable loan.

Loan has a 4 year prepayment penalty. Annuity has a 10 year cash surrender penalty. Worse yet, this financial planner double-ended the deal and did the loan for them, too. They thought the monthly payments were not too bad until I pointed out to them that they were going neg am by about $1,500/mo.

What do they do now?

Can anybody out there think of a possible scenario where this would be a good idea?

The fact that this guy generated two commissions on the same deal smells to high heavens to me, just on it's own.

What do they do, you ask? Well, there is the state insurance commissioner for the annuity. Perhaps some agency that regulates loan brokers in your state. I'd start with the insurance commissioner's office.

If it was a variable annuity product, then federal securities law could be involved I believe.

I am just dying to know the sales pitch this agent used.

The planner is now reinforcing his good idea by pointing to the crash in the real estate market. He points to the fact that their house has gone down in value while the annuity has grown.

Of course, I pointed out to them that value of the home is the wrong variable to use. The should use the mortgage balance. And this mortgage has also grown due to the neg am feature. And that there still remains a spread between the post-prepayment penalty payoff of the loan and the CSV of the annuity.

The only way I can see that the annuity will ever outpace the loan would be for them to realize the Death Benefit Value of the annuity in the near-term. I did not recommend that, though. :)

RUN from this planner as fast as possible. Try this to prove mypoint.

Ask him to put in writing that he is advising your 60+ client to borrow money and invest in an annuity. State what the reason is, what the TOTAL fees are and the surrender fees.

See what happens.

I have a client (62yo) who wants to cash in his thrift savings plan (like a 401(k)) this year because he is convinced that Obama is really going to raise taxes in 2009. I've talked him out of this before. He wants to buy a lake house with the money now because he can get a great deal, he says. This means he will have an illiquid asset he is paying property taxes on, and I know he has no plans to generate rental income. Doubtful it could be rented out anyway.

He cashed in his IRA earlier this year without asking me because he wanted to buy CD's. He could have rolled over to a self-directed IRA from Schwab, and bought CDs in the plan.

One point the client makes that I think is valid is that there is no way taxes are going anywhere but up on a trend line, but I don't think they are going up in 2009, or maybe even in 2010.

Crow, are you an attorney?

The parents want my help. I am not sure what to do now. Should I contact this "planner" and ask him to put in writing why he offered this to his clients and what his commissions were? Should I just refer these clients to an atty? What kind of atty? Should I have these people call the Dept of Insurance? What next?

This thing stinks and I feel like I need to help them.

No disrespect to Southpark, but I don't think it takes a CFP to know what the driving force behind this transaction was. To borrow home equity at prime or prime+ is one thing, to put these folks in a NegAm loan AND sink the proceeds into an annuity?!!? I agree that it borders, if not oversteps, the boundaries of fraud. Are you kidding me?

I agree, I would go hand in hand with them to the insurance commission and let them decide what was and wasn't appropriate. I doubt they will have to analyze this very long to make that determination.

Not sure what the commissions are on a $350k annuity but I could assume that they are very likely tens of thousands of dollars and he probably made 2-4% of the loan amount in commissions on the loan.

I think this case is crystal clear.

Each "sales person" has an office of supervisory jurisdiction. Find out who his supervisor is, the client should write a leter of complaint and ask for their money back. Unlikley, but possible, to avoid a law suit, they can "kill the contract", cash it out and through insurance make the client whole. I doubt this will happen BUT this sales person is a shark and deserves to have his G nodes cut and fed to the fishes.....

A reverse mtge would have been better, although I usually don't reccommend them because of the expense involved.

While you are helping them do the above, it would not hurt put some feelers out for a good civil trial attorney in the area. Some specialize in insurance matters.

The key in a case like this is to get the insurance company on the line. I would take a guess that this agent has already had some complaints against him.

You have the loan broker angle also. It's harder to get to the deep pocket here as the banks have been successful in most cases in walling off from the brokers. We need to change that by the way.

Lot of issues here, many of them legal issues.

As Kevin points out: get that complaint in to the insurance commissioner ASAP. Sometimes the clients can go down and sit with them, the trend now seems to be to get a written complaint on one of their forms. Don't know about CA. All Kevin's advice is good.

Possible, but the annuity is most likely a variable (possibly index) and would that not require a series 6????

I have never met anyone who sells annuities who does not have a B/D, but I see your point.

If so, I agree, go to the insurance examiner

There also has been a recent glut of free-lunch seminars encouraging people to borrow against their home and put the money into cash-value life insurance (UL policies, usually not VUL, most recently EILs)

Therefore, I believe it to be a fixed annuity and the so-called 'planner' to be licensed only in insurance (and mortgages, apparantly)

I agree with the others about contacting the state insurance commissioner and filing a complaint ASAP. You might want to check out the commissioner's website before you call. They have some information on insurance scams in CA. [1]

Here's an article about a lawsuit against insurance companies for elder fraud in CA. [2]

Kevin, The product is, in fact, an Equity Indexed Deferred Annuity. From what you have seen of this combo, can you tell me why this is being done?

Don't know if you've read the SEC Investor alert or FINRA websites.

But here is the link to SEC.

http://www.sec.gov/investor/pubs/equityidxannuity.htm

Here is the link to FINRA.

http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/AnnuitiesAndInsurance/P010614

Note: I am licensed in my state and have sold EIAs when appropriate to seniors. They CAN be suitable and appropriate (for a portion of a client's assets).

They did say that their "planner" told them that they may want to consider walking away from their home. The bank will write off the loan and they can keep the annuity. What a cabron! (Am I allowed to say that here?)

The SEC just ruled that EIAs will become securities and subject to their supervision. I don't believe them to meet the definition of a security, but there is a dire need for supervision of the charlatans who are peddling these things.

The majority of the state insurance boards are pathetic pencil lickers who are incompetent and totally unmotivated to step up to the plate and protect people from financial scam artists. Of course, the SEC has its problems right now, but an added layer of protection can only help the situation.

I did this for not for profit hospitals, colleges and university clients. These clients borrow money for their operations and whatever projects they have coming up, like a new lab or wing. They cannot legally arbitrage (borrow to invest) but because of their tax exempt status, they could borrow (before the auction rate market dried up) at lower floating, tax exempt rates and invest in the same instruments earning the spread between the tax exempt and taxable rates. The money they borrowed was simple interest and they earned compound interest. Because of the nature of the borrowing, any time rates inverted (which never happens) they can simply pay off the debt.

But if you look at former clients like Ascension Health, for example, while they have $7 billion in debt, they have $15 billion in cash and that didn't come from hospital operations! For home owners, they borrow at tax advantaged rates, if their mortgage is deductible and they pay simple interest. If they have a 6% mortgage, it may only cost them 4% or less, depending on their marginal tax rate. If they earn only 4% over 30 years, they will still make money on the transaction because their cash is compounding, while the debt is simple interest. If they earn the money tax free, if they can manage to earn 6% or 8% over 30 years...

So, don't poo poo the strategy, look at the execution and don't get caught up in commissions because that's irrelevant if the strategy works. Check out the assumptions that went into the strategy, i.e. is the borrowing fixed or variable and what are the net projected earnings of the annuity (based on what?), can the borrowers carry the loan from their normal cash flow? You might find that you've got your panties in a wad for no good reason or that a little tweaking will make it work well.

Sound like an annuity salesman.

Profile...........

Why are you letting facts get in the wat of a good annuity sale! (LOL)

That's why these guys HATE when the accountant gets involved. Facts are stubborn things.