Court Tells Frustrated Annuity Investors to 'Get Lost'
by Mark Nestmann: Estate
Tax Reform Provides New Opportunities for Expatriation Tax Savings
a member of a professional association or labor union, can you count
on its leadership to act in your best interests?
you cant. A case in point is a recently concluded lawsuit
brought against the National Education Association, a labor union
representing more than three million public school employees, by
Here, the NEA
marketed a variable annuity it called the NEA Valuebuilder
Plan to its members. It told its members that the Valuebuilder
Plan was the only annuity nationally endorsed by the NEA.
But, the NEA never fully disclosed that the fees for these plans
were as much as ten times as high as those charged for comparable
contracts. The NEA also received a portion of these fees as commissions
from the annuity providers. (Valuebuilder Plans continue to be marketed
to NEA members, but I dont know if the current versions have
the same fee structure as the ones that were the subject of recent
In their lawsuit,
NEA members alleged that their union intentionally misled them into
buying unattractive annuities by preying upon their trust. They
sued under terms of the Employee Retirement Income Security Act
the court disagreed. It ruled that ERISA didnt apply to the
variable annuities and that the members couldnt sue under
its provisions. The members still have the option of bringing a
lawsuit based on other legal theories, but in the meantime, the
legal bills continue to mount.
also brings to mind an even more fundamental principle when it comes
to purchasing insurance or annuities: the solvency of the carrier.
(Im not implying that theres any question of the solvency
of the insurance carriers the NEA used but simply trying to make
a larger point.) Since insurance carriers are regulated by the states,
not by the federal government, each state applies its own law to
compensate policyholders if an insurer becomes insolvent. Typical
state limits protect life insurance and individual annuity cash
values up to $100,000, and death benefits up to $300,000. Benefits
are capped in most states at $300,000 for all policies.
uncertain economic environment, you cant take the solvency
of a company issuing your life insurance or annuity policy for granted.
Insurance giant AIG was too big to fail in the financial
crisis of 20082009, but theres no assurance that in
a future crisis, the government will bail out carriers unable to
fulfill their financial obligations.
count on receiving these payments right away if your company fails.
Your states insurance commissioner will first try to find
other insurance companies to take over policy obligations. If it
fails to do so, your states guarantee provisions step in.
Guarantee payments generally come from an asset pool contributed
by state-licensed insurance companies. Only residents of that state
may be entitled to payments. If enough insurance companies fail,
the asset pool may not be sufficient to pay the guarantees.
For these reasons,
its crucial to conduct due diligence when you purchase life
insurance or annuities:
- Buy only
from the highest-rated companies. Unfortunately, major ratings
services dont provide an accurate picture of a carriers
financial health. All the major services failed to foresee the
collapse of AIG, for instance.
- Ask your
insurance agent for help evaluating the companys financial
safety. Find out if the company has recently experienced a ratings
downgrade. You and your broker can also review media reports,
press releases, public filings, and analyst reports to evaluate
its financial stability.
- If financially
weak companies issued any policies you now own, consider transferring
coverage to a stronger company. However, for life insurance, the
coverage you receive may be much more expensive than that you
gave up, since premiums rise sharply as you grow older. Early
termination of the policy may also trigger penalties and tax liability.
Dont cancel one life insurance policy before you qualify
for another, in case youre turned down due to a medical
condition. With annuities, you may be able to switch from a weaker
company to a stronger one tax-free using a strategy called a 1035
to consider is to purchase non-U.S. annuities or life insurance
policies. This is perfectly legal under U.S. law, and the companies
issuing such coverage often have stronger balance sheets than U.S.
carriers. In addition, many countries provide much stronger asset
protection for funds in an annuity or life insurance policy than
that provided under state law. In addition, you can do a 1035 exchange
from a domestic to an offshore annuity.
with permission from The Sovereign
Mark Nestmann is a journalist with more than 20
years of investigative experience and is a charter member of The
Sovereign Society’s Council of Experts. He has authored over a dozen
books and many additional reports on wealth preservation, privacy
and offshore investing. Mark serves as president of his own international
consulting firm, The Nestmann Group, Ltd. The Nestmann Group provides
international wealth preservation services for high-net worth individuals.
Mark is an Associate Member of the American Bar Association (member
of subcommittee on Foreign Activities of U.S. Taxpayers, Committee
on Taxation) and member of the Society of Professional Journalists.
In 2005, he was awarded a Masters of Laws (LL.M) degree in international
tax law at the Vienna (Austria) University of Economics and Business
© 2011 Mark
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