Charlotte Edition

BEFORE YOU SIGN – READ CAREFULLY

By James W. Mallonee

There is an old saying “there is no free lunch.” Recently, I have been bombarded with cards requesting my presence at a lunch or dinner to learn about retirement products called equity indexed annuities and indexed universal life insurance contracts. The name of the products is a mystery and not well understood by most lawyers and in some cases the sales personnel touting them. Its this failure to fully understand the product that causes buyers to be seduced into buying a product only to learn that they made a mistake.

The major selling point of these products are the guarantee’s that are expressed during the presentations. The biggest selling point is the guarantee of protected losses in the event the equity market goes negative as was seen during the COVID-19 market crash. The term equity used in the title of the product is an indicator that as the stock and bond market goes, your annuity either gains or loses value. Its this value that increases your payouts or can also reduce it depending on what the equity market is doing. In essence, you are handing over money to a company who is investing it with a guaranteed payout either immediately or in the future. The size of the payout is based on the market rising or falling. The idea being that the risk is on the investment company to keep the money coming in to pay you.

The guarantees on the loss side may be stated to say that they act as a stop loss where your investment can never go negative. For example, you handed over $10,000.00 and that amount is guaranteed never to be less regardless of what happens in the market. In essence the investment company is absorbing the losses should there be any in exchange for any profits above a certain percent they get to keep. Thus, if the market increases over eight percent, the company gets to keep that 8+ percent. Seems fair on the surface where the risk is shared in exchange for absorbing losses. While the stop loss is guaranteed, the cap on the high side may not be.

Some of the problems that are beginning to appear from the free lunch presentations are the documents expressing the terms of the indexed annuity. A close look at the terms may show that the guaranteed stop loss is guaranteed for only one year as well as the gains on the cap. You need to search for those paragraphs in the terms of the contract called cap rate minimums. Unfortunately, many people rely on the verbal explanations of the selling personnel who may not fully understand all of the terms of the contract or intentionally avoid them.

You may also discover that the surrender value of the products is extended out multiple years to prevent you from abandoning the investment. Some of the surrender values consist of percentages from your initial or present investment over a ten-year period.

Trying to get a law firm to go to battle and protect your interest in being over-sold is difficult because the defense will focus on you having had the opportunity to fully read the materials and the cost to pursue such a claim by a legal team may far exceed the return for damages. Of course, there is also the embarrassment of having your admission to failing to read and understand the product you purchased.

The alternatives are to compare exchange traded index mutual funds versus the product you are being sold. What would have been the difference in value between an exchange index fund and the annuity you purchased is usually the means a law firm will use in protecting your interest. The comparison is used to show what you would have gained in a cap free product versus the equity indexed contract you purchased. If the difference is significant, then the potential for damages is much higher making your case more opportunistic to a law firm.

This article is intended for informational use only and is not for purposes of providing legal advice or association of a lawyer – client relationship.

Another stumbling block is where are you allowed to seek relief. Some contracts limit your relief to arbitration as opposed to a court proceeding. Lately, what is being seen are equity indexed annuities must be filed in court to obtain relief. The issue is what state are the court proceedings allowed to be brought in.

The message you should be receiving from this article is to be careful. If you do not understand the sales pitch, get the literature and read the terms carefully. If you still do not fully understand the ups and downs, seek out a professional who understands the terms and can advise you on the consequences should you sign up. Then do your own math against a mutual fund indexed in the same category as the product being sold to you. Compare the market increases and decreases over time for both products and make an informed conclusion on what you are buying. Remember, there are no free lunches.

James W. Mallonee (Jim Mallonee) is a graduate with a B.A. degree from the University of South Florida and a Master of Science degree from Rollins College in Winter Park, Florida. He obtained his Juris Doctorate from the University of the Pacific, McGeorge School of Law in Sacramento, California. Prior to returning to Florida to practice law, Mr. Mallonee was employed by Intel Corporation for 22 years in such locations as New Jersey, Florida and California.

In addition to being a member of the Florida Bar since 2003, Mr. Mallonee serves on the Charlotte Community Foundation Committee for asset allocation and teaches Business Law at State College of Florida. Mr. Mallonee is also on the Board of Directors for the Military Heritage Museum located in Charlotte County, Florida.

His firm practices law in the following areas: Probate, Wills & Trusts, Guardianships, and Litigation in the areas of Real Estate, Guardianships and Estates. The firm has two locations in Venice and Port Charlotte, Florida.

James W. Mallonee, P.A.
946 Tamiami Trail, #206
Port Charlotte, FL 33953
(941) 206-2223
Facsimile (941) 206-2224

871 Venetia Bay Blvd., #225
Venice, FL 34285
(941) 207-2223

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