Avoid scams by friendly insurance agents

So how can you avoid getting scammed? The easiest course is not to buy investments from an insurance agent, but that may be tarnishing the whole for the actions of a few.

If approached about an investment, keep these things in mind:

• Don't buy investments from someone who isn't licensed to sell them. Fraudsters often claim their investments aren't really securities. That's baloney. At the very least, your agent should have securities licenses if he or she is selling anything but insurance, Nevrla said, and the investment itself should be registered with the SEC or your state's securities regulator.

• Call your state insurance and securities regulators. Describe the investment to them and ask if they've heard of it, says Gary Sanders, associate general counsel for the National Association of Insurance and Financial Advisors, a trade group that represents 200,000 agents and planners. Regulators won't have heard of every new scam, of course, but you might avoid getting bitten by one that's been around awhile.

• Ask what the agent will get paid, and how that compensation compares to the other products she sells. A reputable agent will talk to you about her commissions, Sanders says, and give you some idea of how much she'll earn on a sale. Evasiveness on this issue should be a warning sign.

• Make sure your agent has some credentials. If your agent is offering financial-planning advice, and you're not getting a second opinion from an independent adviser, then make sure your agent has some designations to show he's done more than study a sales brochure. A ChFC (chartered financial consultant) is good, and so is a CFP (certified financial planner) designation. Both require extensive study and rigorous testing in all facets of financial planning, not just insurance.

• Gray hair is good. Avoid anyone who hasn't been in the business at least two years, Evans said. I like to deal with agents who have been around 10 years or more. Building up a good reputation in a community takes time, and an established agent usually thinks twice before risking her good name. This doesn't guarantee integrity -- most of the agents in the Arizona sweep were in their 50s and 60s, for example -- but your chances of harm are usually greater with an upstart who has little to lose.

• Demand to know the downside. There's an old tune that advises listeners to "Ac-cent-uate the positive, e-lim-inate the negative." That's basically the insurance agent's siren song. Agents know that dwelling on an investment's drawbacks can kill a sale, so they might not even bring up negatives -- even when they're supposed to. So you have to ask, and keep asking until you get answers that make sense. Every investment has its risks and its drawbacks. Know those specifics before you invest.

• Look for the deep-pocketed third party. Any investment your agent is pitching should be backed by a big-name third party, such as a well-known bank, brokerage or insurance company, Evans advises. Again, this won't eliminate all possibility of fraud -- well-known banks and brokerages can be scammed, too. But at least you'll have somebody with deep pockets to sue.

By the way, don't just take the word of the agent or promoter that a big name is involved. Call up the institution independently and ask.

Video: Test your insurance knowledge

The last word

Finally, and most importantly: Give the investment the sniff test. A high commission might interfere with your agent's nasal functions, but it shouldn't affect yours.

"If it looks better than anything you can get anywhere else, and it's being touted as safe, the red flags should go up," Sanders said. "The rules of the market are like the rules of physics. They don't change."

In other words, if it sounds too good to be true . . . well, you know the rest. Or, at least, you should.

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated Sept. 23, 2009

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