Variable Annuities

A variable annuity is a contract between you and an insurance company that combines an insurance policy with mutual fund like investments called sub-accounts. When an investor purchases a variable annuity, they allocate their purchase price between sub-accounts within the variable annuity. These sub-accounts are essentially mutual funds, and are often identical to other mutual funds an investor could purchase outside of a variable annuity.

The insurance component usually provides a guaranteed death benefit. The guaranteed death benefit usually provides that at the purchaser’s death, the purchaser’s beneficiaries will receive the greater of the initial investment less any withdrawals, or the value of the mutual funds making up the variable annuity. While this may sound initially like a no lose situation, there are several drawbacks to purchasing a variable annuity. Drawbacks may include adverse tax consequences, a loss of liquidity, and substantial fees and expenses for management and insurance.

Investors have several possible claims when it comes to variable annuities. First, the variable annuity may have been unsuitable for the investor given their financial situation and needs. Second, the allocation of funds into the sub-accounts may not have been made in a suitable fashion given the specific investment objectives and risk tolerance of the investor. Third, the broker may have misrepresented or omitted material facts about the operation, costs, fees and risks of a variable annuity.

Variable annuities have been much criticized by the financial press for many years. Below are some articles from the past several years highlighting the problems with variable annuities and explaining why they are generally considered to be unsuitable investments for most investors:

  • Wall Street Journal — “AtAnnuityUniversity, Agents Learn How to Pitch to Seniors”
  • The New York Times — “Variable Annuity Guide: A Simple, Complex Idea”
  • Forbes — “The Great Annuity Rip-Off”
  • CBS MarketWatch — Commentary: Annuities are a suckers bet: “Treat ’em like blind 12-year olds”

The Financial Industry Regulatory Authority (FINRA), the governing body of the brokerage industry, has created a special Issue Center-Variable Annuity webpage to provide information for investors and brokers about the problems involved in the sale of variable annuities.

The SEC has also warned consumers about the purchase of variable annuities:

“SEC Variable Annuities: What You Should Know”

The SEC and the NASD n/k/a/ FINRA jointly published a report on the sale of variable annuities.

“Examination findings regarding broker-dealer sales of variable insurance products”

If you believe that you may have been a victim of securities fraud involving a variable annuity, you have certain rights, which you should be aware of, rights which may provide you an opportunity to recover your losses from your stockbroker or brokerage firm.

At Loya & Associates we can help. I represent victims of securities fraud.  Please call or email us today.