Annuity buyers feeling cheated

It turns out that baby boomers and others who bought annuity policies should feel fortunate even if they end up with disappointingly low yields because many face deficits due to high commission fees charged by insurers, according to the JoongAng Ilbo, which examined yields over the past five years on 3.87 million accounts with 59.5 trillion won ($52.8 billion) invested.

Critics say annuity insurance, which has become a popular way to provide income after retirement, is ironically threatening the livelihood of future senior population with yields that are lower than the inflation rate.

Under annuity policies, the insured pays a designated amount, either as a lump sum or in monthly payments, to insurers for a set period of time who then disburse payments at specified intervals, typically after retirement. A main attraction is that the principal paid in is tax-deferred, meaning it can generate interest until it is withdrawn.

Company employee Park Seong-jin is a case in point.

Park purchased an annuity policy from KDB Insurance in September 2009 and has invested 250,000 won every month since then.

He wanted to prepare for retirement and get a tax refund during year-end adjustments.

Curious about how much he had earned after two and a half years, Park inquired about the rate of yield.

He was told by a customer service employee that she didn’t have that information, but he could receive 95.6 percent of money he paid in if he terminates the contract.

Puzzled, Park searched the Financial Supervisory Service Web site, which updates detailed information on 621 annuity policies by insurers, banks and asset management firms including annual returns and commission fees quarterly.

His annuity policy’s cumulative return - or median annual average since the product was released on the market - as of end of December was minus 1 percent.

He learned his insurer took 9.1 percent out of his 250,000 won monthly payments as a commission and management fee.

Although the insurer had bond investment yield of 8.1 percent that, Park ended up with a 1 percent loss because of the steep fees.

“I feel like I’ve been swindled,” Park said. “Who would ever expect that I would lose money from a financial policy I subscribed to for my life after retirement? The government has only helped insurers to stuff their pockets.”

Critics say annuity insurance policies originally created to help the middle class prepare for future are not guaranteed investments, raising the ire of consumers.

According to the financial watchdog, a total of 78 trillion won was invested in annuity insurance, annuity trusts, annuity funds at the end of last year and 59.5 trillion won of that is annuity insurance.

After analyzing yields publicly revealed by insurance companies from 2008 to 2012, average annual returns were 3.6 percent for life insurers and 2.8 percent for nonlife insurers, compared to a 5.6 percent annual return on investments in bond-type funds.

The rate of return for nonlife insurers was below the annual inflation rate of 3.3 percent, and critics blame excessive commission fees.

Life insurers take 7 percent as commission for the first seven years of the annuity, and many nonlife insurers take out as much as six times the monthly premium for the first two or three years.

“Insurers take out commission fees in the early stage of the annuities, while banks increase the level of commission fees later,” said an employee at a life-insurance company. “In the long term, the yield of insurers’ annuities will improve.”

Market observers said many insurers don’t inform customers about the heavy commission fees when they sign up for annuities.

“We get lots of complaints and reports from consumers who say that they never heard about commission fees when they subscribed to annuity insurance,” said Oh Se-heon, a director at Financial Consumer Agency’s insurance bureau. “[The financial regulator] should intervene and require insurance companies to disclose the commission fees to consumers.”

“It seems insurance companies don’t really care about asset management of annuities and their yields in part because consumers are not likely to terminate their annuities because they have to repay exempted taxes,” said an industry insider.

If a person terminates annuities within 10 years, she has to repay 22 percent of exempted taxes to financial institutions.

People who are unhappy about low yield of annuity insurance can transfer the contract to a more competitive rival company that offers other types of annuities, such as annuity trust and annuity fund, but this requires a lot of paperwork and fees of up to 50,000 won.

By Kim Chang-gyu, Kim Soo-yeon [mijukim@joongang.co.kr]