The Complications of Variable Annuities

The two types of annuities are fixed and variable. In a fixed annuity, during the time the account is growing the investor is guaranteed by the insurance company that he will earn a minimum rate of interest. It is also guaranteed by the insurance company that the periodic payments will always be a guaranteed amount per dollar in the account.

In a variable annuity, the purchase payments are invested by the investor from among a range of different investment options, typically mutual funds. The amount of the periodic payments received eventually and the rate of return on the purchase payments will vary depending on the performance of the investment options selected. For several types of “variables”, there are options which include investment choices in sub-accounts which is similar to mutual funds. But, a typical variable annuity basically offers three basic features which are not commonly found in mutual funds: a death benefit, tax-deferred treatment of earnings and annuity payout options that can provide guaranteed income for life.

The Securities Exchange Commission (SEC) regulates the securities which are variable annuities and the consumers are recently warned by the commission about the purchase of variable annuities. A document titled: SEC Variable Annuities: What You should know to help consumers understand certain issues were published by The SEC. To protect the investors is the mission of The SEC and to maintain orderly, fair and efficient markets and to facilitate capital formation. It is the responsibility of The National Association of Securities Deals (NASD) to oversee all the U.S. stockbrokers and brokerage firms. The NASD is generally overseen by the SEC.

New rules were recently proposed by the NASD to govern the sale of variable annuities. Several “Investor Alert” warnings were published to the investors regarding investing in variable annuities. Also, the NASD and the SEC have jointly published a report on the Examination Findings, sale of variable annuities which are regarding the broker-dealer sales of variable insurance products.

The NASD published an investor warning which was regarding the unique issues they raise for investors and the sales of deferred variable annuities in 2003. The NASD wants informed decisions to be made by the prospective variable annuity buyers about how to invest for their retirement. Some of the highlights from that warning are as follows:

• Scrutiny is deserved by the marketing efforts used by some variable annuity sellers especially when the targeted investors are the seniors. At times, the investors are scared or confused by the sales pitches for these products. Investors should be aware of their restrictive features under the right circumstances and understand that charges and substantial taxes may apply for the early withdraw of money invested as variable annuities can be appropriate investments for them.

• The varieties of features are sometimes confusing to investors which are offered by variable annuity products. It is important for t he investors to understand before purchasing a variable annuity all the product’s terms and conditions which includes the full prospectus.

If a broker has provided investment advice to purchase variable annuities and it has caused losses to an individual just because it was inappropriate according to the investor’s personal investment profile/goals or he has not explained the product fully, legal advisors should be contacted immediately by the investor for legal guidance and direction.

If it is shown that the financial risks involved were not disclosed and that the broker’s suggestions were not within the specifications included in the risk profile, the investors may be compensated for their losses