A variable annuity is a combination of an insurance policy and mutual funds, or mutual funds with an insurance wrapper. 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.
Although a variable annuity is a tax deferred investment-meaning gains or income made within a variable annuity are not taxed till withdrawn-there are substantial fees associated with a variable annuity. It has been argued that these fees offset the tax deferral feature of variable annuities.
When sold a variable annuity, investors have several possible claims.
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 and risks of a variable annuity.
Variable annuities have been much criticized by the financial press. Below are some articles highlighting the problems with variable annuities and explaining why they are generally considered to be unsuitable investments for most investors:
- Forbes — “The Great Annuity Rip-Off”
- CBS MarketWatch — Commentary: Annuities are a suckers bet: “Treat ’em like blind 12-year olds”
- Wall Street Journal — “At Annuity University, Agents Learn How to Pitch to Seniors”
- The New York Times — “Variable Annuity Guide: A Simple, Complex Idea”
The NASD 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:
Likewise, because many variable annuities are unsuitable for investors, the NASD, predecessor to FINRA, has found it necessary to repeatedly remind its members to make sure a variable annuity is suitable for an investor before selling a variable annuity:
- NASD NTM 96-86
- NASD NTM 99-35
- NASD NTM 00-44
- Advertising of Bonus Credit Variable Annuities
The NASD even proposed a new rule to specifically govern the sale of variable annuities:
- NASD NTM 04-45
The NASD published several “Investor Alerts” warning investors about investing in variable annuities:
- NASD: Variable Annuities: Beyond the Hard Sell
- NASD: Should You Exchange Your Variable Annuity
The SEC has also warned consumers about the purchase of variable annuities:
- SEC Variable Annuities: What You Should Know
The SEC and the NASD 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 variable annuities, 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.