Smart Retirement Shopping 
High-Pressure Tactics

Winston Wong first learned about reverse mortgages over a plate of chicken.

The 73-year-old San Jose, Calif., retiree accepted an invitation two years ago to a seminar at a local restaurant, where, during a free lunch, a salesman pitched him on ways to borrow against his condo to finance a dream retirement. The pitch sounded so good, says Mr. Wong, "You think, this is something you really need now."

He almost bit. But the deal raised alarm bells with his daughter, who persuaded him first to meet with a financial planner, who ultimately steered him away by showing that his pension and Social Security already provided plenty of income.

Many older consumers aren't so fortunate. A host of ill-suited financial products -- from reverse mortgages, to life-settlement contracts and variable annuities -- are being targeted at retirees with pitches designed to tap into deep-seated fears about the affordability of retirement.

Regulators say the size of the problem is impossible to quantify. Still, it has reached such a magnitude that the National Association of Securities Dealers, a self-regulatory agency for the financial industry, this year will launch a campaign to teach people how to see through the selling techniques used by pitchmen to pry open their wallets.

Some products are perennial favorites among unscrupulous salespeople: complex variable annuities, top-heavy life-insurance policies, and living trusts. Others reflect efforts among agents, brokers and planners to benefit from increased interest in relatively new creations such as long-term-care insurance, reverse mortgages, life settlements and even Medicare Part D prescription coverage.

In many cases, these products have legitimate uses. But used improperly they can also leave elderly savers poorer or unable to get at their money in an emergency without paying hefty penalties.

Here's a guide to some of the trickiest products and latest pitches, along with advice on protecting against trouble.

Life Settlements

The Product: A financial transaction in which you sell your life-insurance policy for more than the policy's cash value, but less than its face value.

The Hard Sell: Turn your insurance policy into cash while you're still alive to enjoy it. Use the windfall to pay for everything from long-term-care insurance to a blowout vacation.

The Pros: For people who no longer need insurance but who do need cash, selling an unwanted policy can generate more money than cashing in a policy. The strategy can be particularly appealing with term-life policies, which have no cash value and which policyholders would otherwise let lapse.

The Cons: If you continue to need insurance coverage, selling an existing policy isn't wise. Rates to replace your coverage could be unaffordable, or you could be uninsurable. Also, you're spending down money your heirs may need after your death -- and while insurance benefits paid to heirs are generally income-tax-free, the profits from selling a contract are taxable at ordinary income rates, which are generally the highest rates.

Regulators have begun scrutinizing the industry because of concerns about the way these products are sold. The NASD is set to soon publish an investor alert to warn consumers about the dangers of life settlements.

The Fix: None. Once you sell your policy, you can't get it back.

Reverse Mortgages

The Product: A mortgage letting older homeowners tap into their home's value without selling the house or having to make home-equity-loan payments.

The Hard Sell: Unlock the cash to improve your standard of living, to pay for long-term-care insurance, or to invest in annuities and life insurance.

The Pros: For seniors with pressing financial needs who are cash-poor but house-rich, a reverse mortgage "can be a beneficial way to get the basic income you need to stay in your home" or to pay for necessary expenses, says Sally Hurme, senior program manager with AARP Financial Security.

The Cons: Reverse mortgages are costlier than traditional ones. Moreover, because reverse mortgages are repaid only when a house is sold or the borrower dies, heirs may be forced to sell the house before they want to or find other assets to unload, possibly raising other tax issues.

In the most egregious cases, sellers persuade homeowners to take out reverse mortgages to fund other investments such as annuities, says Cheryl Kringle, an assistant attorney general in Washington state. The flaw with that strategy: The investment returns generally aren't large enough to cover the cost of the mortgage and interest payments. "This is wreaking havoc on people's lives," says Ms. Kringle.

The Fix: You have the right to cancel the mortgage within three days, says Ken Scholen, director of the AARP Foundation's Reverse Mortgage Education Project. But past that "there's not much you can do."

Variable and Indexed Annuities

The Product: An insurance contract wrapped around mutual-fund-like subaccounts.

The Hard Sell: Variable annuities provide tax-advantaged savings and help heirs avoid probate. Equity-indexed annuities offer stock-market gains while protecting against losses.

The Pros: Aside from Social Security and a pension, annuities are about the only source of guaranteed lifetime income. For seniors, however, the best ones are usually immediate annuities, which begin to pay out within one year of purchase.

Variable annuities can be useful for people still in the work force who are planning to retire in 10 to 15 years, and who have already maxed out their annual contribution to 401(k) plans and IRAs.

The Cons: Regulators continually warn that variable and indexed annuities are ill-suited for retirees. The reason: These products generally require a holding period at least a decade long. Getting your money early imposes surrender charges that can exceed 10% of the annuity's value and last seven to 10 years or more.

Equity-indexed annuities have their own kinks. Most limit potential gains from the stock market. If stocks roar ahead one year by 20%, for instance, you might only get 8% of that return in your annuity, depending upon the contract.

While annuities do grow tax-deferred, the profits are taxed at ordinary rates at withdrawal. By comparison, profits on stocks and mutual funds in a standard brokerage account are taxed at lower capital-gains rates. Moreover, at your death the value of your ordinary stocks and funds is stepped up to current market value, meaning heirs avoid taxes on earlier profits. Annuities receive no step-up.

The Fix: Depending on the state you live in, consumers generally have at least 10 days to cancel an annuity contract. Conversely, you can contact state securities and insurance regulators (as well as the firm that sold the contract) and request they examine the suitability of the sale. Be sure to include some proof that the contract wasn't suitable for this particular situation.

Another way out: Annuities generally let you withdraw 10% of the contract value each year without penalty. "Do that each year until you reach a point where the surrender charge is less onerous and you can withdraw the rest of the account completely," says Peter Katt, a fee-only insurance consultant in Mattawan, Mich.

Life Insurance

The Product: Whole-life, universal-life and variable-life insurance contracts that combine a death benefit with a savings/investment component.

The Hard Sell: Your estate will be consumed by estate taxes. Investing your money in a life-insurance policy helps you avoid that, since death benefits pass tax-free to heirs.

The Pros: Not much with variable life, because the death benefit and cash value fluctuate with underlying investment performance, and that's a lot of risk for retirees.

Universal and whole life can be useful in narrow circumstances. For instance, retirees who can't spend as much cash as their portfolio kicks off might consider moving assets into a whole-life policy as a way to ultimately transfer assets to heirs tax-efficiently. In this case, you're not buying insurance for the sake of insurance, you're taking advantage of the policy's tax characteristics, says Mr. Katt.

The Cons: First, "there is no estate-tax advantage to life insurance," says Glenn Daily, a fee-only insurance consultant in New York City. While life-insurance beneficiaries don't pay income tax, the sum is still subject to estate taxes. Second, these sorts of insurance policies are frequently sold based on overoptimistic projections of future account values.

Then there are the surrender charges. Many policyholders see on their statements that they have an account value of, say, $75,000. But cancel your contract and try to recoup the money and you might find you get substantially less. That's the surrender charge, which, Mr. Katt says, "can be in place 10 or 15 years, or longer."

The Fix: Don't just drop your policy. Check with your insurer to see if you have a reduced, paid-up death benefit available, as the cash value of your contract may be enough to fully pay for reduced coverage without imposing any future premiums.

You can also cash in your policy for the cash value. But, as with annuities, you may face a surrender charge that eats away all or some of that value.

If you're certain you don't need or want the insurance policy, you might try the life-settlement market, where you can sell your policy to recoup at least some of its value.

Living Trusts

The Product: A legal entity into which a person transfers certain property, with instructions on how the property is to be distributed upon that person's death.

The Hard Sell: Probate is a nightmare. A living trust will help your heirs skip probate proceedings.

The Pros: These trusts do indeed let you pass assets to heirs while avoiding probate.

The Cons: Many consumers' estates are too small to warrant probate (amounts vary from state to state). Many of the sellers of living trusts aren't lawyers and aren't offering individualized advice about whether a particular person even needs a trust. The trusts are boilerplate documents and may not meet your specific needs.

The sellers are simply after the fee to create the trust, often $1,500 or more, and frequently use the sale as a way to learn about other assets a senior has that can potentially be exploited. The Washington state attorney general's office is asking the state legislature to approve a new consumer-protection law that makes it illegal for anyone other than a lawyer to sell living trusts.

The Fix: If you have a living trust bought through a seminar or someone who isn't a lawyer, check with a reputable attorney to see if the document accomplishes what you need it to. These trusts can be changed, if necessary.

If you're being pitched one, know that there are other strategies to avoid probate. In many states," says Steven Gorin, an estate-planning attorney at St. Louis law firm Thompson Coburn, "a competently written will can help you avoid probate, too."