Variable Annuities

An annuity is a contract in which an insurance company promises to make periodic payments to the insured, either starting immediately or deferred to some future date. An annuity can be purchased via a lump sum payment or through a series of payments, called premiums, over an agreed upon time frame. Earnings on monies contributed as premiums grow tax-deferred until a withdrawal is made, or regular income is taken.

Annuities have two phases: the accumulation phase and the distribution phase. The accumulation phase occurs when premiums are paid into the policy to fund the annuity. The distribution phase occurs when the insurance company sends guaranteed periodic minimum payments to the insured, usually monthly.

Many investors are already familiar with traditional “fixed” annuities. A fixed annuity offers the insured a set stream of future payments, such as $1,500 per month, often over the remainder of the insured’s lifetime, in exchange for a premium. These payments are fixed in nature through an established interest rate that is governed by the terms of the underlying insurance contract.

Variable annuities work quite differently. A variable annuity’s rate of return is not fixed because premiums paid into the policy during its accumulation phase are allocated to various investment portfolios (typically mutual funds) via subaccounts. With a variable annuity, the amount of premium required to fund the policy and the anticipated future income stream are both largely dependent on how the investments in the underlying subaccounts perform. As a hybrid financial product including an insurance contract, as well as an investment portfolio component, variable annuities are sometimes described as mutual funds in an insurance wrapper.

While variable annuities offer tax-deferred earnings growth and may include other features such as a death benefit or asset protection for estate planning purposes, these financial products are extremely complicated and can present significant risks to an investor. While variable annuities may be recommended as safe investment vehicles—particularly to older investors nearing retirement—these investments are complex and costly. In addition to hefty up-front commissions (as high as 7% to 8% in some cases), variable annuities typically impose considerable annual fees and expenses, including fund expenses for the subaccounts, administrative fees, and mortality and expense risk charges.

In addition to being costly, variable annuities are illiquid financial products. Most variable annuities carry a sales or “surrender charge” that may start as high as 8% percent in the first year and then decline. Furthermore, because variable annuities are designed as long-term investments, an investor may incur negative tax implications if the need arises to liquidate and exit the investment. This is especially true if withdrawals are made before age 59½.

Unfortunately, because of their high commissions, some financial advisors may improperly recommend variable annuities without fully disclosing their market risks (tied to subaccount performance), their high costs, or their illiquidity. As with other complex and expensive financial products, a broker’s recommendation to purchase a variable annuity may call into question the suitability of the investment. Other relevant questions surrounding the recommendation to invest in a variable annuity include whether the investor received full and accurate disclosure of the variable annuity’s components and features, such as commissions, surrender charges, fees and realistic performance projections based upon subaccount investments.

The attorneys at Giarrusso Law Group LLC possess considerable experience successfully representing investors in variable annuities, as well as other complex and expensive financial products, who have suffered losses due to financial fraud or related misconduct. Investors may pursue a claim to recover monies through securities arbitration before the Financial Industry Regulatory Authority (FINRA), or in some instances, through litigation. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.