New York Times Article. This newsletter was prompted by a New York Times article of July 8, 2007, advising of a scam used by certain financial advisors who publicize fancy titles on business cards and advertisements, such as CERTIFIED SENIOR ADVISOR. The article pointed out that this certification is issued by a for profit company and was promoted by insurance companies who like to promote the sale of annuities to senior citizens.

There are certain individuals in our region who publicize this certification and the New York Times article should be a warning to any one dealing with such advisors.

The full story can be accessed at http://www.nytimes.com/2007/07/08/business/08advisor.html.

You can do your friends a favor by pointing out advertisements or flyers that use this certification. However, the Times article prompted some comments on annuities themselves.

Types of Annuities. Generally speaking there are two types of annuities. Fixed Annuities pay a stipulated sum to the annuitant (who is usually the owner of the contract), either for life, for a fixed period of years, or for some combination of those. For example, a fixed annuity can be written for the life of the annuitant or ten years certain. The advantage of the this type of annuity is that payments would continue for a total period of ten years, if the annuitant happens to die before the end of the ten years. The flip side of that contract is that the annuitant is guaranteed a payment for life. Of course, putting a term certain into the contract reduces the lifetime benefit as compared to an annuity which simply pays for the life of the annuitant with no guaranteed payment. Fixed annuities can have other guarantees. Fixed annuities can also be payable for life with a guaranteed death benefit for the annuitant’s designated beneficiaries.

Fixed annuities can be immediate, or deferred. That is, the contract can begin payment to the annuitant immediately or payment can be deferred so that monthly payments can commence at a later date, for example, at age 65.

Variable Annuities. Variable Annuities are probably the most popular annuities purchased by seniors. The variable annuity typically permits the annuitant to withdraw funds, with some limitations. The annuity contract typically contains "investment vehicles" such as mutual funds. The value of the contract is determined, of course, by the value of the underlying investments. The principal reason for seniors purchasing variable annuities is to defer income tax on investment gains, dividends and interest, from the underlying investments in the policy.

However, many seniors are not mindful of the withdrawal penalties contained in the contract for excess withdrawals over and above the specified limits. Typically, in my experience, these penalties will apply for excess withdrawals within the first 6 to 12 years of the contract. The penalties typically gradually reduce during the penalty period until the penalties disappear.

Exceptions to the withdrawal penalty should be carefully scrutinized. My experience in reading several of these contracts is that the so-called withdrawal for nursing home patients is often worded so narrowly that the exception is not as beneficial as a salesperson might claim.

Medicaid Annuities. Many advisors and annuity sales people try to trap gullible seniors into purchasing annuities by making allegations and claims about Medicaid. Usually, in my experience, these individuals claim to have a much greater knowledge of the Medicaid rules and regulations than they really have. Very few are attorneys specializing in this area of the law. In my experience, many of the annuities purchased with the assumption that the assets will be protected in the event nursing home care is required will not do the job. Substantial penalties are often paid to cancel these contracts in order to establish Medicaid eligibility.

DRA 2005. The Deficit Reduction Act of 2005, which went into effect February 8, 2006, enacted new requirements for annuities which are purchased within five years of a Medicaid Application. This is a subject which is susceptible to conflicting interpretations, and is also subject to the regulations by individual states.

Attorneys differ in the interpretation of the federal law, and also differ with the interpretations of DRA 2005 by the various states. There is very likely to be litigation and court appeals of various rulings in this area until the requirements of the federal law have been clarified by court decision. Suffice it to say that seniors should be very careful in purchasing annuities with any sort of expectation of Medicaid exemption. As pointed out above, seniors should be especially cautious and wary of purchasing any contracts from high pressure salespersons or those who use the Certified Senior Advisor designation.Caveat. This newsletter is certainly not intended as a treatise on Annuities. Many financial advisors are far more knowledgeable than I. However, working with seniors and their needs has been an education, to say the least.