Avoid scams by friendly insurance agents

By Liz Pulliam Weston

Many years of covering the insurance industry have convinced me of two things:

A smart, conscientious insurance agent can be a valuable addition to many people's financial team of advisers. And a bad agent can deplete your wealth quicker than the most efficient cat burglar.

Unfortunately, it's the bad agents who have been in the news a lot in the past few years. Among the misdeeds:

• Promissory-note scams. Hundreds of agents were caught up in enforcement actions by 28 states, the Securities and Exchange Commission and the North American Securities Administrators Association for selling so-called promissory notes to investors. Typically touted as low-risk and conservative, the investments were actually high risk and often fraudulent. Regulators estimate that investors lost hundreds of millions of dollars.

• Illegal investment sales. Arizona regulators accused nine insurance agents of selling unregistered securities, including promissory notes, viatical settlement policies and interests in ATM machines. Investor losses were estimated at more than $12 million. The Arizona Corporation Commission's Securities Division said the sweep was prompted by "growing concerns about cross-over abuses in the insurance and securities industries." In another action, Florida regulators levied similar charges against eight insurance agents who sold "certificates of grantor" contracts issued by a company that promised returns of 9.25% to 15% for one- to 10-year investments. A related SEC filing charged that money from new investors was used to pay bogus returns to earlier investors in a classic Ponzi scheme. Investors lost an estimated $17 million.

• Affinity fraud. In Kansas, an insurance agent pleaded guilty to fraud charges after persuading at least 10 investors, including members of his church, to invest nearly $200,000 with him. The agent used the money to pay personal expenses, including payments in a bankruptcy plan. Targeting members of one's own religion or ethnic group is known as affinity fraud.

These examples don't include more routine insurance frauds, such as selling phony policies or pocketing policyholders' premiums. And they don't even touch on sales of legal but unsuitable investments -- such as saddling elderly investors with high-risk, high-cost annuities. (See "Beware of the annuity salesman's scare tactics" for more.)

But these cases do point up why it's smart to be careful when an investment-touting insurance agent heads your way. Even if you're not susceptible, you might want to keep an eye on the people in your life who are, such as elderly relatives who have close, personal relationships with their agents.

Why the focus on insurance agents?

• Agents have a built-in customer base. Scam artists have figured out, regulators say, that many agents have large, loyal customer bases -- and that these agents can be lured to tap these customers when the commissions being offered are high enough. Insurance agents typically know details about their customers' financial lives that allow them to tailor their sales pitches, and they may have built up trust and rapport with these clients over many years.

• Many investors are looking for yield and safety. At the same time, the incomes and wealth of the most vulnerable people -- senior citizens -- have climbed in recent years. Because of the huge drop in interest rates since 2000, lower yields on legitimate investments have left many seniors vulnerable to pitches for "safe, high-return" alternatives, said fraud expert Marty Nevrla. "There's an increasing senior-citizen base who has the cash," said Nevrla, director of insurance fraud for the Arkansas Insurance Department and a member of the anti-fraud task force run by the National Association of Insurance Commissioners. "The promoters . . . know the money is out there even more than it ever has been in the past."

• Many agents lack financial sophistication. The promoters typically tout their schemes, including high commission rates, to agents who then push the "investments" on their clients. Unfortunately, the vast majority of insurance agents lack training in evaluating investments. That is apparently why so many couldn't figure out that "safe" and "high return" are mutually exclusive. Regulators and insurance insiders say such a lack of financial sophistication means the agent is sometimes a victim along with the client. Many of the agents involved in the promissory-notes scams, regulators say, thought the investments were legitimate and lost their own money as well as that of their customers.

Video: Test your insurance knowledge

"If you don't know what you're doing, it's easy to get taken in," said Dave Evans, a certified financial planner and vice president of retirement for the Independent Insurance Agents & Brokers of America, a trade group that represents 300,000 property and casualty agents and their employees.

Add to that the fact that more than half of the nation's 3.2 million agents are independent, Nevrla said. That means they are not regularly audited or reviewed by the companies whose products they sell. And state regulators don't have the resources to chase after any more than the most outrageous agents.

"They're floating around out there basically unsupervised," Nevrla said.

Continued: Things to keep in mind

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