Variable annuities have become the step child of the annuity world. In some instances, the reputation is well deserved. Over the past few years, complaints have dramatically increased regarding unscrupulous agents who take advantage of elderly investors with risky annuity investments that cost too much and are unsuitable for their needs. Meanwhile, the agents touting the annuities pocket thousands of dollars in commissions.
In one case, a Florida insurance agent, Bijan Razdar, sold 85-year-old Alice Bouchard a variable annuity that essentially tied up her money until she reached the age of 101. Bouchard needed easy access to her money. As it turns out, if she wanted to withdraw her money, she'd have to pay a massive penalty in the form a 25% surrender charge. To make matters worse, the same agent persuaded Bouchard to sell various annuities she had previously purchased and buy new ones. Each time she did, she had to cough up more money for the surrender charges.
Unfortunately cases like this are not uncommon, which is one reason investors need to know what they are getting into when it comes to investing in a variable annuity.
A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.
As a variable annuity owner, the value of your investment varies based on the performance of the investment options selected. Those options typically are mutual funds that invest in stocks, bonds, money market instruments, or a combination of the three.
Variable annuities are designed to be long-term investments and a way to meet retirement and other financial goals. They are not suitable for meeting short-term goals because substantial taxes and insurance company charges may apply if you withdraw your money early. Variable annuities also involve certain investment risks.
Equity-Indexed Annuities — Another Red Flag
In a recent consumer notice on variable annuities, the Securities and Exchange Commission (SEC) warned investors about a number of potential issues associated with variable annuities, including a mortality and expense risk charges, costly administrative fees, underlying fund expenses, and fees and other charges for special features offered by some variable annuities (i.e. a stepped-up death benefit, a guaranteed minimum income benefit, or long-term care insurance).
Seniors are particularly vulnerable to high-pressure sales tactics from brokers and agents pushing variable annuities. One of these tactics is the so-called free lunch seminar. The ploy works something like this: The sponsoring company or individual holds a free lunch at a hotel, restaurant, golf course or retirement community, with the promise of providing educational information for retirement. Too often, however, the promises vanish and are replaced by sales of unsuitable investments. Variable annuities are one of the most common pitches at free-lunch seminars, according to the SEC.
If you or someone you love has been sold an unsuitable variable annuity, contact us to tell your story. You also can learn more about variable annuities in Variable Annuities: Beyond the Hard Sell, from the Financial Industry Regulatory Authority (FINRA).