Not so long ago, there was a group action by several Insurance Commissioners against the Nationwide Life for its failure to create an effective regime for the supervision of agents selling annuities. The action was settled for $2 million so it wasn’t considered a major problem, but it does give us the chance to talk about annuities and what can go wrong. The traditional policy for your life accumulates value over the years and, when the moment comes, there’s a payout of a lump sum to your family and dependents. But, if you want, you can either buy an annuity or convert your life policy to an annuity. This starts in the same way. You pay regular installments and build up value. Then, when the due date arrives or you exercise the option, the policy starts to pay out a regular income. It’s one of the ways in which you can save for your retirement and the monthly amounts add to your other pension amounts and keeps your head above water.

To protect you from exploitation, only insurance companies are allowed to sell annuities and each state’s Insurance Commissioner has the responsibility of looking out for your interests. Should a Commission discover the insurer is giving you a short measure, it can step in and order changes. In bad cases, the insurer can be faced with a heavy fine. The reason for this supervision is that the premium payments are tax deductible and it’s the responsibility of the states to ensure you get the best possible value for your money. The Commissioner also ensures you are not using the annuity policy for some avoidance purpose that would be unlawful.

You should approach these policy with some degree of care. Although there are tax savings, the investment returns are often not impressive. Most people benefit from a consult with an independent financial advisor. An experienced advisor will know which companies front-load their policies with big fees and management commissions. You should also have someone do the math to check the minimum guaranteed returns are reasonable.

During the first phase of the policy, you pay into the insurer. All benefits are delayed until the fixed date or you trigger the option after a minimum number of years has passed. At this point, the insurer starts paying the monthly amount either to you or to the person you nominated. Now comes the interesting part. Are the payments to continue for a fixed period of time or during the remaining years of your life? Further, will there still be benefits payable when you finally give up on life? Never buy a policy unless you understand exactly what the insurer is offering and how much each option costs.

Life insurance policies can be quite complicated documents both in their language and the way they calculate the benefits. Independent advice is essential. If you decide to go-it-alone and later find the insurer missold the policy, complain to the Insurance Commissioner. Assuming the Commissioner agrees with you, you usually find you are fully compensated for all your losses. This is not advising you to be passive when someone sells you a financial product. The Commissioner is not going to be sympathetic if you bought a life insurance product without making a reasonable attempt to understand it.