Taking Aim at Military Scams

The men and women who protect our country are getting ripped off.

Military personnel are often young and transient, but they earn a regular paycheck from Uncle Sam. That makes them prime targets for shady sales practices and financial criminals. "Whenever you have a major mobilization of the armed forces, there are opportunities for individuals to use very aggressive sales practices," says John Oxendine, Georgia's insurance commissioner.

Crooks also know when units return flush with extra cash from combat pay. "The sharks are circling the bases," says Kathy Graham, president and chief executive officer of the Better Business Bureau of Coastal Carolina. "Individually, our soldiers don't make a lot of money. Collectively, it's a big payroll."

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Five years ago Kiplinger's revealed that many soldiers had been pitched high-fee investments that included a whopping 50% sales charge the first year. Several months later other news media reported that young service members were being sold expensive life-insurance policies that they didn't need -- and didn't even realize that they had bought.

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After a flurry of nationwide investigations and congressional hearings, First Command Financial Planning, which sold the high-fee investments, was fined $12 million for making misleading statements. American-Amicable Life Insurance has now paid $70 million in refunds and increased life-insurance benefits to policyholders.

New laws and Department of Defense rules are supposed to shield military personnel from the bad guys. But the problems haven't entirely disappeared. Once again, abuses in the sale of insurance and investments -- not to mention outright fraud -- are starting to surface. Con artists are using military insignia to sell everything from bogus insurance to contaminated meat. And identity thieves are taking advantage of deployments and the military's ubiquitous use of Social Security numbers to find new victims.

But this time, state and federal regulators, local organizations and the military are on the alert. "We've seen the increasing costs of these personal-finance problems," says Holly Petraeus, director of the Better Business Bureau Military Line, which provides consumer education to military families. "People were even losing their security clearances."

Common scams and inappropriate sales practices can be broken down into four categories. In each case, you can protect yourself -- and find far better deals on the products offered.

Unsuitable Insurance

After investigations uncovered a nationwide pattern of abuses, American-Amicable Life was obliged in 2006 to provide cash refunds or increased policy benefits to 92,000 policyholders, totaling $70 million, and to discontinue sales of its Horizon Life policy. Plus, the company was banned from military bases for five years.

New rules now ban insurance agents from soliciting military personnel in barracks or at meetings at which attendance is not voluntary. In addition, agents aren't permitted to use superiors or officers to help sign up serv-ice members who are junior in rank or grade, and agents can't misrepresent insurance policies as investments.

The new laws are helping to reduce inappropriate insurance sales on base. Now, however, "sales of inappropriate life-insurance products are occurring off base," says a report by the inspector general's office at the Department of Defense.

In Florida, regulators have also found that unscrupulous agents are changing their tactics, says Ray Wenger, financial administrator for the Florida Department of Financial Services. For example, his office is investigating charges that American Fidelity Life and Trans World Assurance sent a van to pick up military personnel and take them to meetings off base, promising prizes and free dinners. "Instead of going to high-ranking officers and asking them to coerce people to join, they're paying enlisted people $20 to $25 for every person they bring over," says Wenger.

Florida recently issued a show-cause order alleging that the two companies misrepresented an affiliation with the U.S. military and charging that one agent inaccurately claimed the military's own life-insurance program couldn't be counted on to pay. The companies have filed a petition requesting an administrative hearing to dispute the allegations.

In Georgia, the state insurance department has revoked the licenses of several agents who violated its military sales regulations over the past year. It currently has several open cases involving companies accused of violating the new sales laws.

What you can do:

Max out your military insurance first. Servicemembers' Group Life Insurance, or SGLI, costs only 6.5 cents per $1,000 of coverage per month, or $312 per year for the maximum $400,000, regardless of your age or health. You can also get up to $100,000 in coverage for your spouse. "SGLI is a phenomenal insurance product, and it's a great price," says Oxendine.

Check out insurers and agents with your state insurance department if you need to buy additional coverage. Ask about licensing, complaints and disciplinary actions. Make sure the policy doesn't have a war exclusion. Report problems to insurance regulators and to the community-service office at the base.

Visit the NAIC's Military Personnel Web page. The NAIC's InsureUonline.org also offers insurance advice for members of the military.

High-Fee Invesments

In 2004, state and federal regulators fined First Command Financial Planning $12 million for making misleading statements and omitting important information when selling mutual funds with upfront sales charges of up to 50%. First Command agreed to the sanctions without admitting or denying the allegations.

First Command is still in business, and its mutual funds no longer have high front-end fees. But some of its clients are being urged to switch to managed accounts, and making that switch may not be the best option, says Patrick Beagle, a financial plan-ner in Fairfax Station, Va., and a former Marine who specializes in counseling military families. "The problem is that once people have paid those upfront fees, they have to decide whether to cut their losses and move."

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Salespeople for other companies pushing high-fee investments pounce on mem-bers of the military who receive a substantial windfall, whether at retirement or from an annual bonus or deployment pay. Beagle is helping a Navy captain who was sold a variable annuity with a 16-year surrender charge even though he had better sav-ings options.

What you can do:

Max out your Thrift Savings Plan before investing anywhere else for retirement. "The Thrift Savings Plan is a terrific retirement vehicle, and it has very, very low-cost investment options," says John Gannon, of the Finra Investor Education Foundation. You can invest up to $15,500 in 2008, and you can add all of your tax-exempt pay while serving in a combat zone. Total contributions can't exceed $46,000 in 2008. When you withdraw the money, you won't be taxed on contributions from tax-exempt pay. For more information, go to www.tsp.gov.

Make the most of a Roth IRA. You can invest up to $5,000 in 2008, even if all of your income is tax-exempt pay from a combat zone.

Take advantage of the military's Savings Deposit Program. Members of the military deployed in certain regions can deposit up to $10,000 into a special account that pays up to 10% per year. The interest is taxable when the money is withdrawn; interest stops accruing 90 days after you leave the eligible region. Go to www.dfas.mil/militarypay.html for more information.

Check the broker's record. Use Finra's BrokerCheck tool to get information on a broker's licensing status and any disciplinary actions. Also look up the broker and the company through your state securities regulator, which offers programs to help military families, such as California's Troops Against Pred-atory Scams campaign.

Affinity Fraud and Scams

Criminals will use any affiliation with the military, whether real or not, to gain a family's trust. Often these are small-time operators going door to door. In one case, a salesman was peddling phony life insurance just before deployment, preying on families' fears and disappearing with several hundred dollars in "premiums." In another case, a man claiming to be with the naval-base commissary in San Diego sold meat that turned out to be tainted.

Military spouses are susceptible to work-at-home scams when looking for a job in a new town, and they often end up paying $50 to $200 or more for a start-up kit and get nothing in return. And the BBB recently uncovered a scam in which a con artist pretended to be a soldier about to deploy who had to sell his car quickly, and asked the buyer to send the money to a fake escrow account. There was no car, and the crook pocketed the cash.

Sometimes affinity scams are on a larger scale, as when thieves target a tightly knit group by singling out a respected member. For instance, the Securities and Exchange Commission recently charged three promoters with allegedly running a real-estate Ponzi scheme that cost more than 75 investors an estimated $10 million. Many of the victims were in the military and had been solicited by a member of the Air Force.

Military families are also magnets for identity thieves because their Social Security numbers are everywhere. Plus, they may be hard-pressed to monitor their credit records and bills when they're deployed. Last year, the Federal Trade Commission discovered one brazen ID-theft scam in which the thief, posing as a member of the Red Cross, called a soldier's family members to tell them their relative had been injured in Iraq. The caller then said that family members would have to complete certain paperwork and provide personal information before they could get any more details.

What you can do:

Check out the company or salesperson with the base community-service office. Army Community Service at Fort Hood, Tex., has a database that cross-references complaints made to the community-service, legal-assistance and housing offices on base, as well as the local Better Business Bureau. The base's legal-assistance office will also help you review contracts.

The Armed Forces Disciplinary Control Board at each base can prohibit anyone on the base from doing business with certain salespeople or companies. "It's like a death blow for a business to be put on this list," says Richard Kitterman, executive director of the BBB serving central and south-central Texas, who works with the control board at Fort Hood. Just the threat of being put on the banned list can often help resolve complaints.

Contact the Better Business Bureau. Check a business's complaint record and get help resolving problems through the local BBB.

Put an active-duty alert on your credit report. This free alert notifies creditors that you're on active military duty and asks them to take extra precautions to verify the identity of an applicant before extending credit. Include the phone number of a trusted friend or family member for creditors to call while you're deployed. To place the alert, contact Experian.com, Equifax.com or TransUnion.com.

Predatory Lending

Payday-loan lenders, which sometimes charge more than 400% interest, used to line the commercial strips around many bases. But a law passed last October caps payday-loan rates at 36% for members of the military and has caused some lenders to close up shop. A few states now ban payday loans entirely.

That hasn't stopped some criminals from targeting cash-strapped military personnel with so-called advance-fee loans. Borrowers are told that they are credit risks and are asked to pay $900 to $1,800 (or more) upfront. Then the money disappears. "We get hundreds of inquiries about this every couple of weeks," says Petraeus.

What you can do:

Get a 0% loan through a military emergency relief fund. Contact the com-munity-service office at your base for details. At Fort Hood, soldiers can borrow up to $1,000 interest-free as often as twice a year through the commander's referral program. Car repairs and other basic needs generally qualify, and hardship cases may be eligible for more money.

Join a credit union. Credit unions on base often offer short-term loans at competitive interest rates, says Petraeus.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.