New California Law Safeguards Seniors Against Annuity Penalties
California lawmakers recently passed legislation that protects seniors who choose to invest in annuities against insurer malpractice.
According to a July 17 Central Valley Business Times article, the law acts as a safeguard for seniors and their beneficiaries from potential financial losses that stem from insurers’ surrender penalties, which are applied to annuities paid as a death benefit. The law does this by codifying the practices to which insurers ought to adhere.
“While many companies do not currently pay out a death benefit that is less than the premium paid, some insurers do apply surrender penalties reducing the death benefit below the total premiums, which is the reason for this important legislation,” said California Insurance Commissioner Dave Jones.
In addition to the 10% early-withdrawal penalties for people who withdraw funds from their annuities before age 59½, insurance companies are known to charge the same penalties to death benefits that an annuity owner’s spouse would receive upon his or her death.
As a result, early death in an annuity contract can often result in individuals receiving minimal interest, or even death benefits that are lower than the actual sum paid in the initial annuity premium.
To combat this, the new law mandates that insurers administer death benefits for fixed deferred annuities that are at least equal to the value of the annuity issued.
The Central Valley Business Times reports that the legislation will go into effect beginning Jan. 1, 2016.
The potential pitfalls of investing in annuities were also illustrated in a recent California fraud case.
According to Consumer Affairs, John Slawinski, 60, a Palm Desert insurance agent, was sentenced to more than nine years in prison and ordered to pay some $3.4 million in restitution fees after being found guilty of an annuities scam that targeted 13 victims in their 70s and 80s.
Despite the dangers of annuity fraud and penalties, however, it’s important to remember that annuities can be a smart, secure investment tool, especially for those nearing retirement age.