Variable Annuity Concerns
VARIABLE ANNUITIES
In its simplest form, a variable annuity is a contract entered into between you and an insurance company whereby the insurance company agrees to make periodic instalment payments that may begin immediately or may begin at a later specified date. There are two general categories of variably annuities which are an immediate annuity and tax-deferred annuities. An immediate annuity allows you to make a single lump-sum payment and the insurance company pays an immediate monthly payment that will continue until your death in which the monthly amount will be based on your life expectancy. A tax-deferred annuity, on the other hand, allows you to invest your money through periodic payments and allows it to grow tax-deferred until you begin to receive payment. Variable annuities offer a range of underlying investment options which are typically mutual funds, bonds, or money market instruments.
Considering some of the complexities involved in investing in a variable annuity, investors need to be aware that while a variably annuity may invest in an underlying mutual fund, variable annuities are still a separate investment vehicle from a mutual fund. The National Association of Securities Dealers (NASD) has specific rules governing communications between broker-dealer members and their clients regarding variable annuities. Specifically, a broker-dealer is required to properly identify and clearly explain to an investor that the investment vehicle which they are acquiring is a variable life insurance policy or a variable annuity and that there are significant differences between a variably annuity and a mutual fund. They must not represent or imply that the product being offered or the underlying account is a mutual fund.1 Therefore, if this was not clearly explained to you the possibility that you were placed in an unsuitable investment may exist.
The NASD also provides specific requirements regarding representations as to the liquidity of this investment. Specifically, as these products usually involve "substantial charges and/or tax penalties for early withdrawals, there must be no representation or implication that these are short-term, liquid investments. Presentations regarding liquidity or ease of access to investment values must be balanced by clear language describing the negative impact of early redemptions. Examples of this negative impact may be the payment of contingent deferred sales loads and tax penalties, and the fact that the investor may receive less than the original invested amount. With respect to variable life insurance, discussions of loans and withdrawals must explain their impact on cash values and death benefits."2 Again, it is important that investors understand the nature of the product that they are purchasing and that it be clearly explained that variable annuities are not short-term liquid investments. If this was not fully disclosed to you, depending upon your financial goals and circumstances this investment vehicle may have been improper for you.
Claims about Guarantees/Risks Involved
It is important that investors understand that while insurance companies may provide a number of specific guarantees which include a minimum death benefit or a minimum schedule of payments, the relative safety should not be overemphasized by the insurance company as it still depends upon the claims-paying ability of the issuing insurance company.3 "There must be no representation or implication that a guarantee applies to the investment return or principal value of the separate account. Similarly, it must not be represented or implied that an insurance company’s financial ratings apply to the separate account."4 Furthermore, such features as a guaranteed minimum income benefit, which provides a minimum level of annuity payments even if there is insufficient funds in the account to support such payment that may be due to investment losses, will typically cost extra. A "stepped-up" death benefit may also provide a guaranteed minimum death benefit, but will carry charges that will reduce your account value. These are important factors one should consider before investing in variable annuities.
Disclosure of fees/Surrender Fees/Tax Penalties
Variable annuities have a number of charges that may diminish the overall value of the account and in turn reduce the return on investment. First, surrender charges may apply if you try to withdraw money from the annuity during a certain time period after purchase which may vary from six (6) years to ten (10) years. Although, the surrender charge gradually declines over many years, such charges may be substantial. Second, mortality and expense risk charges are designed to compensate the insurance company for the risks that it is assuming under the contract. The charge for this is typically a percentage of the value in the account. Third, administrative fees are also charged which can either be a flat fee or a percentage of the value of the account. Fourth, there may also be costs imposed by the underlying investment option such as costs associated with investing in a mutual fund which may include a front-end load and 12b-1 fees. Fifth, there may be front-end loads associated with the annuity as the agent will likely be making a commission on the sale. Therefore, investing in a variable annuity may be more costly than expected and investors are cautioned to be fully aware of all the costs and fees.
Miscellaneous Issues
Significant tax issues arise in the decision of whether to purchase a variable annuity. While contributions and earnings to your account may grow tax-deferred, should you need to begin withdrawing funds from the account prior to age 59 ½ there will be a ten percent (10%) early withdrawal tax penalty, which could be on top of surrender charges depending upon when the annuity was purchased.
Conclusion - Investors beware/Those who own may have a claim - S.O.L.
While variable annuities do provide certain benefits, these investment vehicles may be more costly at accomplishing an individuals investment goals then other products. It is suggested that you shop around and consider all investment options in correlation with your investment goals. If you have purchased a variable annuity and feel that either the investment was misrepresented to you or that had you been made aware of certain information regarding purchase you would not have done so, then you may be able to bring legal action for recovery of monies lost. Beware that certain time limitations for bringing a claim apply and require that you act diligently.
As many Americans near the age of retirement and with growing concern that social security will run out in the near future, various retirement vehicles have emerged and seen growing popularity. Particularly, variable annuities have seen tremendous sales volume over the past decade. However, many investors are unaware that variable annuities may be an unsuitable investment vehicle given their financial circumstances. Investors should be aware that both the Securities and Exchange Commission and the National Association of Securities Dealers (a self-regulatory agency that governs member broker-dealers) have issued both investor advisory notices and guidelines concerning variable annuities. There are concerns that fees, risks, and supposed tax advantages are not in fact being properly and fully disclosed to the investor. Investors should also be aware that if they were sold a variable annuity that was unsuitable for them given their financial conditions, lack of awareness concerning the fees and risks associated with the investment, or failure by either an insurance agent, broker, financial planner, or other financial planner to disclose alternative investment vehicles they may bring a claim for recovery of monies.
In its simplest form, a variable annuity is a contract entered into between you and an insurance company whereby the insurance company agrees to make periodic instalment payments that may begin immediately or may begin at a later specified date. There are two general categories of variably annuities which are an immediate annuity and tax-deferred annuities. An immediate annuity allows you to make a single lump-sum payment and the insurance company pays an immediate monthly payment that will continue until your death in which the monthly amount will be based on your life expectancy. A tax-deferred annuity, on the other hand, allows you to invest your money through periodic payments and allows it to grow tax-deferred until you begin to receive payment. Variable annuities offer a range of underlying investment options which are typically mutual funds, bonds, or money market instruments.
Considering some of the complexities involved in investing in a variable annuity, investors need to be aware that while a variably annuity may invest in an underlying mutual fund, variable annuities are still a separate investment vehicle from a mutual fund. The National Association of Securities Dealers (NASD) has specific rules governing communications between broker-dealer members and their clients regarding variable annuities. Specifically, a broker-dealer is required to properly identify and clearly explain to an investor that the investment vehicle which they are acquiring is a variable life insurance policy or a variable annuity and that there are significant differences between a variably annuity and a mutual fund. They must not represent or imply that the product being offered or the underlying account is a mutual fund.1 Therefore, if this was not clearly explained to you the possibility that you were placed in an unsuitable investment may exist.
The NASD also provides specific requirements regarding representations as to the liquidity of this investment. Specifically, as these products usually involve "substantial charges and/or tax penalties for early withdrawals, there must be no representation or implication that these are short-term, liquid investments. Presentations regarding liquidity or ease of access to investment values must be balanced by clear language describing the negative impact of early redemptions. Examples of this negative impact may be the payment of contingent deferred sales loads and tax penalties, and the fact that the investor may receive less than the original invested amount. With respect to variable life insurance, discussions of loans and withdrawals must explain their impact on cash values and death benefits."2 Again, it is important that investors understand the nature of the product that they are purchasing and that it be clearly explained that variable annuities are not short-term liquid investments. If this was not fully disclosed to you, depending upon your financial goals and circumstances this investment vehicle may have been improper for you.
Claims about Guarantees/Risks Involved
It is important that investors understand that while insurance companies may provide a number of specific guarantees which include a minimum death benefit or a minimum schedule of payments, the relative safety should not be overemphasized by the insurance company as it still depends upon the claims-paying ability of the issuing insurance company.3 "There must be no representation or implication that a guarantee applies to the investment return or principal value of the separate account. Similarly, it must not be represented or implied that an insurance company’s financial ratings apply to the separate account."4 Furthermore, such features as a guaranteed minimum income benefit, which provides a minimum level of annuity payments even if there is insufficient funds in the account to support such payment that may be due to investment losses, will typically cost extra. A "stepped-up" death benefit may also provide a guaranteed minimum death benefit, but will carry charges that will reduce your account value. These are important factors one should consider before investing in variable annuities.
Disclosure of fees/Surrender Fees/Tax Penalties
Variable annuities have a number of charges that may diminish the overall value of the account and in turn reduce the return on investment. First, surrender charges may apply if you try to withdraw money from the annuity during a certain time period after purchase which may vary from six (6) years to ten (10) years. Although, the surrender charge gradually declines over many years, such charges may be substantial. Second, mortality and expense risk charges are designed to compensate the insurance company for the risks that it is assuming under the contract. The charge for this is typically a percentage of the value in the account. Third, administrative fees are also charged which can either be a flat fee or a percentage of the value of the account. Fourth, there may also be costs imposed by the underlying investment option such as costs associated with investing in a mutual fund which may include a front-end load and 12b-1 fees. Fifth, there may be front-end loads associated with the annuity as the agent will likely be making a commission on the sale. Therefore, investing in a variable annuity may be more costly than expected and investors are cautioned to be fully aware of all the costs and fees.
Miscellaneous Issues
Significant tax issues arise in the decision of whether to purchase a variable annuity. While contributions and earnings to your account may grow tax-deferred, should you need to begin withdrawing funds from the account prior to age 59 ½ there will be a ten percent (10%) early withdrawal tax penalty, which could be on top of surrender charges depending upon when the annuity was purchased.
Conclusion - Investors beware/Those who own may have a claim - S.O.L.
While variable annuities do provide certain benefits, these investment vehicles may be more costly at accomplishing an individuals investment goals then other products. It is suggested that you shop around and consider all investment options in correlation with your investment goals. If you have purchased a variable annuity and feel that either the investment was misrepresented to you or that had you been made aware of certain information regarding purchase you would not have done so, then you may be able to bring legal action for recovery of monies lost. Beware that certain time limitations for bringing a claim apply and require that you act diligently.
posted by Russakow Ryan & Johnson at 4:08 PM
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