Especially in the investment arena, you are bombarded with opportunities that many times sound too good to be true. Even sophisticated investors can fall prey to the likes of Bernie Madoff, who squandered some $50 billion of clients’ money.
Pyramid schemes will continue to work most of the time, because they are focused on investor greed and/or ignorance along with the fact based on the old adage that “there is a sucker born every minute.”
I was reminded of that when an elderly client of mine recently fell for something that, to my way of thinking, sounds too good to be true. It involved the questionable world of annuities.
I am not saying this to put down annuity investments, but my negative view has been shaped by 25 years of experience in never having met anyone who was satisfied with his annuity features. It’s a matter of fact, I have spent more time having helped to get people out of an unwanted annuity than supporting their purchase.
I attribute this to the fact that most investors do no go out researching and purchasing a suitable annuity, but that they “have been sold annuity products,” most of which subsequently did not live up to the owner’s expectations.
My client decided on his own to enter into an agreement, of which he shared only that he bought an annuity in XYZ Company paying a 12% bonus and 8% guaranteed.
In other words, if he invested $100k, his annuity would be worth $112k right away with an 8% guaranteed return. I don’t know for how long.
If this sounds too good to be true, it probably is. I consulted a friend who used to own an insurance company and sold these products, and he was dumbfounded at the terms. He could understand the bonus part, but the return.
I am not making any accusations, since I don’t have all the facts, but it makes me wonder if this insurance company is raising assets at all costs.
After all, what can go wrong? If you are a big name company, and you make deadly financial mistakes, there will be TARP, GARP or a host of other programs available (at taxpayer’s expense) designed to bail you out.
It’s the moral hazard environment we have become accustomed to live in. If you have any thoughts as to how an insurance company could offer such a product, please share them with me.
I really would like to be wrong of the suspicion that this could end up eventually being another bailout scheme.