It looks like insurance agent Glenn Neasham is about to get his ticket punched at the big house. The California advisor found himself in hot water after selling an indexed annuity to a woman with dementia back in 2008.

Annuities are structured investment products sold by insurance companies like Genworth Financial (NYS: GNW) , or, in this case, Germany's Allianz. Indexed annuities are more complex than plain vanilla annuities, as the interest they pay is derived from a formula based on market indexes like the Dow (INDEX: ^DJI) or the S&P 500.

Prosecutors claimed that Neasham took advantage of 83-year-old Fran Schuber to sell her an indexed annuity for $175,000 and, in the process, pocket a $14,000 commission for himself. While there normally isn't a legal issue with selling an indexed annuity to an 83-year-old (more on that in a moment), Schuber was suffering from early-stage dementia at the time and may not have been able to understand what she was buying.


Glenn Neasham isn't the problem
From the press reports, it's tough to tell whether Neasham really is the predator that the jury apparently saw him as. But what bothers me about this story goes well beyond Glenn Neasham.

Selling a complex insurance product to an 83-year-old with dementia is unconscionable. However, that it's A-OK to sell this product to any 83-year-old -- or, perhaps, any average investor at all -- boggles my mind.

Allianz's MasterDex 10 Annuity -- the product sold to Fran Schuber -- is an illiquid, long-term product. In order for holders to get any of the many promised benefits, the bulk of their investment will stay tied up for more than 15 years -- first a five-year deferral period and then a minimum 10-year annuity payout. Schuber would have been nearly 90 before she could have reasonably started taking payouts from the annuity.

But even for younger folks, the complexities of indexed annuities like the MasterDex 10 are daunting. Not surprisingly, Allianz's marketing materials make the supposed benefits very clear:

  • You get a 10% "bonus" added to your investment right up front;
  • Your interest is based on equity indexes; and
  • "Your premium and bonus are protected from index losses."

The downsides, however, are far less clear.

Though the brochure outlines a handful of ways to tap into the money tied up in the annuity, many of those options are far from attractive.

Withdrawal Option

Downside

Take a contract loan You can only borrow a limited amount, and the interest rate was a usurious 7.4%.
Take a 10% withdrawal You can only do this once per year, and the total of the withdrawals can't exceed 50% of your premiums without triggering penalties.
Take a lump sum or distributions over less than 10 years You lose the upfront bonus, you lose all of the highly touted market-index gains, and you're left with 87.5% of your original premiums and a 1.5% interest rate.

If that isn't enough for you, the actual index-based interest that you receive may leave you disappointed. Sharp-looking graphs in the brochure show that between 1995 and 2004, $100,000 in the MasterDex 10 would have -- with the help of that 10% upfront bonus -- grown to $234,427. But because of the way interest is calculated for the MasterDex 10, that performance was far short of the index's actual return. An investor that simply bought and held SPDR S&P 500 (NYS: SPY) over the same period would have ended up with $72,355 more.

Got all that? Great! Sign here.
Somebody reasonably adept at math and willing to sit down and think through the details could probably figure out why one investment advisor called this "the investment from hell." But it usually doesn't work that way. Statistics from a 2009 FINRA survey are very revealing:

  • 58% of non-retired households have not tried to figure out how much they need for retirement.
  • 29% of those with mortgages on their homes said they didn't know whether the mortgage was interest-only or had an interest-only option.
  • 53% of those with an auto loan said they didn't compare offers with different lenders.
  • 26% of investors with self-directed employer retirement plans or non-employer plans don't know whether they have more or less than half of their account in equity products.

With many Americans apparently ill-equipped to make "normal" financial decisions, how do they have any shot at unwinding the reality of a complex financial instrument like an indexed annuity as it's being pitched by a slick broker?

When we look at the case of Glenn Neasham, the question shouldn't just be whether Allianz's MasterDex 10 was appropriate for Fran Schuber -- obviously it wasn't -- but rather, whether these types of financial products are appropriate at all for the mass market that they're aimed at.

Beware of free
The word "free" comes up quite a few times throughout the MasterDex 10 marketing materials, but the word "fee" only shows up twice -- both times in a section touting the lack of fees or sales charges. For any consumer, the alarm bells should start to go off as soon as it looks like you're getting something for nothing.

Remember:

  • In the Neasham/Schuber case, Glenn Neasham was paid a whopping $14,000 for selling this product.
  • As promised in the brochure, the buyer "gets" a 10% upfront bonus. For Fran Schuber, that would have been $17,500.

And yet there's no mention anywhere of what Allianz gets out of this. I don't think I have to put on my tinfoil cap to suspect that somebody's getting screwed here -- and it's probably not Allianz.

The bottom line is that though Glenn Neasham may be on his way to jail, the real story here is much bigger than Glenn Neasham. This is not just a story of one particular broker doing ill to a client. This is a story of an entire system that pits brokers and advisors at odds with clients in a savage battle to scalp clients for big profits.

To really tell this story, though, we need your help. Whether you're a broker or financial advisor yourself, or a client of a broker or financial advisor, we want to hear your side of the story. Chime in down in the comments section or send us an email at tips@fool.com.

At the time this article was published The Motley Fool has sold shares of SPDR S&P 500 short. Motley Fool newsletter services have recommended creating a put butterfly position in SPDR S&P 500. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.Fool contributor Matt Koppenheffer owns shares of Genworth Financial, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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Rich Reinhofer

I won't argue that annuities are a good investment for anybody but you have to understand that they are simply life insurance. And to attack annuities in general as a bad investment is also an attack on purchasing life insurance. They are two sides of the same coin. If you think annuities (fixed or otherwise) are more complicated than a "life insurance policy" then you need to go to the back of the line.

But this is a good news story in one sense, we have a system of justice that works.

June 16 2014 at 7:49 PM Report abuse rate up rate down Reply
Jamessmith

All of these statements could be reality


http://www.myfhaexperts.com/s

July 27 2012 at 3:06 AM Report abuse rate up rate down Reply
Glenn Neasham

“I personally don’t believe in selling annuities like the MasterDex 10 with the 15-year period to a person who is unlikely to benefit from it,” Abelson said, calling it a “higher commission product.” Neasham’s commission was 8 percent, which was $14,000.

“When you’re thinking about suitability, I think people need to be a little more realistic about what people’s health needs are later in life,” Abelson said, pointing out the high cost of nursing home care. “It’s really hard to say situation-to-situation, but this was the bulk of this woman’s estate. Basically she had in some sense very little liquidity after this money. I don’t believe personally that things like the MasterDex 10 are good for people over a certain age. But criminally, that’s something different.”

Schuber had a $239,000 CD coming due when she visited Neasham. In reviewing Schuber’s finances, tax situation and goals, Neasham said it was apparent she wanted a legacy product that reduced the impact of taxes and wanted to build value. She bought the $175,000 annuity and had about $100,000 in CDs and cash for liquidity.

When Neasham had the preliminary discussion with Schuber and Jochim, he started on the paperwork. “On the health questionnaire, I asked about her health and she quoted ‘good,’ ” Neasham said, adding that Schuber seemed alert and comprehending the information. “I did my due diligence.”

When InsuranceNewsNet asked Abelson how insurance producers can know for certain that elderly clients have dementia, she said producers can ask questions to ascertain their clients’ mental state.

“They can do a mini mental exam like, ‘What year is it? Who’s the president?’ And make sure somebody actually knows what they’re doing. And sometimes there are things you can ask in just general conversation. I don't know the best answer,” Abelson said. “Obviously, insurance agents are in the business of selling, so they’re not in the business of doing mini mental exams.”

Neasham’s attorney, Mitchell Hauptman, said even if Neasham knew Schuber had dementia, it still wouldn’t automatically constitute theft.

“He had to know more than simply that she may have had dementia. He had to know that she in fact lacked the capacity to consent, which is a legal conclusion that’s significant,” Hauptman said, adding that Schuber’s son took her into conservatorship during the trial, basically taking custody of her more than three years after the transaction. “That says that nobody thought she needed to be conserved for another three-and-a-half years [after the annuity sale]. And once that happens, then she cannot enter into a contract, obviously.”

But before the conservatorship, Hauptman said Schuber even with dementia still had the authority to enter into contracts.

“There are lots of people in America with dementia today,” Hauptman said. “At what point in the course of a disease do we just automatically deprive them of their civil rights?”

Schuber never took any of the 10 percent annual withdrawals she was entitled to. She also did not ask for a refund of her annuity, which her son requested after the trial. Allianz refunded the full amount earlier this year.

Neasham is seeking an appeal of his Oct. 21 conviction of felony theft from an elder. He was sentenced on Feb. 29 to 300 days in jail, which was reduced to 60 days. He is seeking a public defender because he cannot afford his own attorney. He had errors and omissions liability insurance but it did not cover criminal matters.

Click here to read more on the Glenn Neasham case.

Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. He was also vice president of communications for an insurance agents’ association. Steve can be reached at smorelli@insurancenewsnet.com.

March 23 2012 at 11:00 PM Report abuse rate up rate down Reply
Glenn Neasham

Neasham said he didn’t see any issues with Schuber’s cognitive ability, although Abelson said Jochim had answered some questions for Schuber. Neasham said Schuber answered many other questions and said she wanted to defer financial matters to Jochim.

What did raise a red flag was her choice of beneficiary, which was Jochim and his daughter was contingent beneficiary.

Neasham discovered that Fran and Ted Schuber were estranged and Jochim produced a document showing that he had been named the beneficiary on the CD since 2004. So, Neasham had Fran Schuber sign a document acknowledging that she was naming Jochim the beneficiary and that she understood the terms of the annuity.

Abelson said a key piece of evidence was the concern expressed by the manager of the bank branch where Schuber had the CD.

“Basically, the bank employee told him [Neasham] not necessarily that she had dementia, but that she didn't understand the transaction and basically that she was being influenced by the boyfriend,” Abelson said. “But basically that she didn't understand what was going on. That would be my summary of what was said.”

Neasham agreed with that version of events on the day Fran Schuber and Jochim went to the Savings Bank of Mendocino to get money from the maturing CD for the annuity. He said when someone called him from the bank, he explained the details of the annuity to the manager, “but then she said, ‘we don’t have a problem with the annuity – we have a problem with Lou.’ ”

After the conversation with the bank, Neasham said he asked Schuber if she understood the annuity she was buying.

“She said she did and gave me a check with a big smile on her face,” Neasham said of the check that he sent to Allianz. Schuber had never complained to an official about buying the annuity.

The bank made a complaint about Jochim to the county district attorney’s elder abuse unit, which did not charge anyone in the investigation, but sent the case to the state Department of Insurance. The state’s investigation led to the theft charge against Neasham.

The prosecutor said the sale was considered theft because Schuber was deprived “for an extended period of time [of] the major portion of the value or enjoyment of the property,” according to her response to Neasham’s request for a new trial.

The MasterDex 10, which had been the most popular indexed annuity for several years, had a five-year deferral and 10-year payout. After the five years, the owner can annuitize and get a guaranteed monthly income for 10 years. During the period, the owner can take out 10 percent annually; 20 percent if the owner is in a nursing home. The owner starts with 87.5 percent of value and is credited 1.5 percent annually and would be able to “break even” after seven years if the owner surrendered the product.

Abelson said the annuity was inappropriate in Schuber’s situation.

March 23 2012 at 11:00 PM Report abuse rate up rate down Reply
Glenn Neasham

By Steven A. Morelli
InsuranceNewsNet

The agent who was convicted of theft for selling an annuity to a woman with dementia was never proven to have known the client was impaired, according to the prosecutor in the case.

Dementia was a central element in the case that led to the felony theft conviction of Glenn A. Neasham, an annuity producer in northern California. He said he was not aware his 83-year-old client had dementia or Alzheimer’s when he sold her an Allianz MasterDex 10 indexed annuity in 2008. Two of his assistants also testified that they did not see signs of dementia.

The prosecutor argued that the client, Fran Schuber, had been diagnosed with dementia in 2004 and was not capable of consent in the purchase of the $175,000 annuity, which was approved in California for sale to people up to 85.

After the verdict, Lake County Deputy District Attorney Rachel Abelson said in a court filing that there was evidence that Neasham knew Schuber could not provide consent for the sale.

“There was sufficient evidence presented to show that Fran Schuber was not capable of consenting to the transaction in question and evidence showed that he [Neasham] knew that at the time of the evidence,” according to the prosecutor’s motion opposing Neasham’s request for a new trial.

But in an interview with InsuranceNewsNet, Abelson said she was not able to show that in court.

“Not necessarily that he knew that she had Alzheimer's or dementia, I couldn't necessarily prove that,” Abelson said. “The son told him, but we couldn't really pinpoint the time. It might have been at the transaction. Of course, I think he [Neasham] denies that he ever knew that she had this diagnosis.”

Neasham, 52, Hidden Valley Lake, Calif., does still deny that he knew Schuber had dementia. He also said that Schuber’s son, Ted, had told him that he was concerned about Fran’s health but was not specific.

“If he had mentioned that she had Alzheimer’s or dementia, I could have stopped it right there,” Neasham said. “But he didn’t. The only comment he said to me was he was concerned about his mom’s overall health. And I thought, ‘H’mm, I’m concerned about my mom’s overall health, too.’ He never said what the details were.”

When InsuranceNewsNet asked Ted Schuber in a phone interview why he did not tell Neasham about his mother’s dementia, Schuber disconnected the call.

Neasham had contacted Ted Schuber after his mother and boyfriend, Louis Jochim, made an unsolicited visit to Neasham’s office to talk about annuities to get a better return on a CD that Schuber had coming due.

March 23 2012 at 10:58 PM Report abuse rate up rate down Reply