A variable annuity is a contract entered 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. A variable annuity typically has 2 phases: an accumulation phase and a payout phase. During the accumulation phase, your money is invested in various subaccounts that operate like mutual funds. For example, you could designate 65% of your investment to a stock fund and 35% to a bond fund. The money in the subaccounts will increase or decrease over time depending on the performance of the particular fund. Variable annuities are illiquid and are thus not suitable for investors who may need reasonable access to their money. During the accumulation phase, if you need to withdraw money, you may have to pay a “surrender charge” and may also have to pay a 10% federal tax penalty if your withdrawal occurs before the age of 59 ½.
In addition to providing a tax sheltered vehicle for investing, variable annuities can contain a component of life insurance and have various complicated riders that purport, among other things, to provide certain minimum returns or to protect against certain types of losses. Variable annuities are frequently so complex that they are not adequately understood by either the financial advisor who recommends them or the firm’s supervisor who oversees that broker’s sales. To make matters worse, variable annuities pay extremely high commissions and thus incentivize financial advisors to make a fraudulent sale even when the product is not suitable for the client and/or the client does not understand what he or she is purchasing.
In addition to their complexity and penalties for early withdrawal, variable annuities contain layers of fees and expenses that can sap returns, making them inferior investments to equivalent mutual funds. Other potentially fraudulent abuses include “1035 exchanges” (where a financial advisor recommends swapping one annuity for another and thus obtains yet another rich commission) and sales within a tax-deferred account (e.g. within an IRA) which eliminates the strongest selling point for variable annuities – tax deferral.
If you own a variable annuity that you bought due to the misrepresentations or omissions of your financial adivsor, we would like to help. Contact the attorneys at PDC Law for a free, informative consultation at 901-820-4433.