Know the Financial Scams that Target Seniors
Older Americans have most of the money, and crooks know that. So do people who operate within the law but beyond the usual definition of ethical, selling people products that aren't appropriate for them. That is why we have a number of ill-suited financial products specifically pitched at those 55 and over, and especially at those over 70.
Senior financial scams all have a common theme.
They play on the widespread fear about the cost and affordability of retirement. Like many legitimate financial pitches, the scamsters emphasize that they will preserve or increase retirement income or ensure more wealth is available to heirs. Some of the scams are relatively new; others are perennials. Many mimic or use similar names to useful and conventional financial products.
Here are some widespread or growing scams, identified by regulators.
Medicare Part D Annuities.
The prescription drug program is only in its second year, but it has attracted those seeking extra profits from it. The idea is that the annuity will pay for prescription drugs and out-of-pocket costs. But like regular Part D policies, terms and covered drugs can change. If you want to change coverage, there could be penalties for cashing out the annuity. There are too many unknowns with this approach. It is safer to buy regular Medicare Part D coverage and let others experiment with the annuities.
In last month's visit we explained how these mortgages work and when they are appropriate. But some salespeople say they should be used to pay for vacations or other nonessential spending. Others persuade seniors to take out the mortgages to buy investments such as annuities. The expenses of a reverse mortgage are so high that it is unlikely an annuity could earn enough to make the homeowner whole, much less come out ahead. Reverse mortgages should be last-choice financing for those who want to stay in their homes and have no other cash sources to pay for essential expenses.
This financial product has legitimate uses but is not appropriate for everyone. The most abusive sales are of cash value policies (whole life, variable life, universal life). These policies have investment and cash value features in addition to the death benefit.
One problem is that if the insured retains ownership of the policy in order to tap the cash value when needed, the policy benefits will be included in the estate and possibly subject to estate taxes. Another shortcoming is that the desirable results of the policies are achieved only if the very optimistic assumptions of the sales projections are met; often they fall short. A final problem is that it is difficult to change one's mind, because of high surrender charges that can run for 10 or 15 years. These policies are best for someone with excess cash and real life insurance needs, not for those trying to stretch their cash.
Life insurance settlements.
Many people have old life insurance policies for which the need has passed. Perhaps the policies were bought to pay off a mortgage or the children's education in case of premature death. Or a current need for cash, such as long-term care, might override the life insurance need.
There are firms willing to buy these policies. They will pay cash now and wait to receive the insurance benefits down the road. Usually the amount they will pay for a cash value policy exceeds the amount that would be received from liquidating the policy.
If you need the life insurance or your heirs will need the benefits to pay your debts, selling the policy is not a good idea. You probably won't be able to replace the policy later at a reasonable cost. Also, be aware that profits from the sale will be taxed at ordinary income rates.
There is a place in many estate plans for living trusts, but the trust often are oversold or not set up right. The main reason for a living trust is to avoid probate, which can be a lengthy and costly process.
But in many states a relatively small estate gets a streamlined probate process that is cheaper than a living trust. Some 'living trust factories' give everyone essentially the same trust. They do not pay close attention to a client's individual situation or the rest of the estate plan. Also, a living trust has no value unless assets are legally transferred to it. That means changing deeds, car titles, bank accounts, and other moves. Many people do not take this step. They pay thousands of dollars for a living trust that holds no assets. April 2007.
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