Variable Annuities

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Variable Annuities

Variable annuities are contracts between an individual and an insurance company where the insurer agrees to make periodic payments to the individual beginning either immediately or at a future date. Sales of variable annuities have taken off over the past decade, in large part due to the commissions around 5%. The annuity business has long been criticized by regulators and consumer advocates for misrepresenting its products and preying on senior citizens, and now a number of states are implementing laws to increase oversight and scrutiny of some annuity sales.

The Securities and Exchange Commission and the National Association of Securities Dealers found “weak” practices regarding sales suitability, disclosure, supervision and training in a recent examination of broker dealers selling variable annuities. While variable annuities appear popular in sales, the investment only makes sense for a certain group of the population. In 2004, the Securities and Exchange Commission and the National Association of Securities Dealers said many investors had complained that their brokers sold them annuities without explaining the risks, taxes or fees involved.

Because it can be difficult to understand the different risks taxes or fees involve between annuities, the National Association of Securities Dealers (NASD) proposed regulations in July 2005 that would mandate disclosure documents to explain annuities in plain English and require a supervisor to double check if the sale is fitting before issuance of a contract. Aggressive sales tactics have particularly targeted seniors. Marketing variable annuities to the elderly has become a big business generating millions of dollars in commissions. Because seniors control such a large percentage of retirement dollars, the age group is a logical target.

Massachusetts announced in early August 2005 after state regulators applied pressure that Bank of America agreed to allow customers who were 78 years or older when they were sold a variable annuity in 2003 and 2004 to get a refund. In response to the Bank of America action, it was predicted that other financial services would also be forced to offer the same type of opportunity to their customers.

New Jersey, California and a number of other states have implemented laws that would increase the oversight and scrutiny of some annuity sales. In July 2005, New Jersey began enforcing its Senior Citizen Investment Protection Act, which limits how long annuity sellers can impose surrender charges. The state became the third state, alongside Utah and Washington, to limit to no more than 10 years the length of time insurers can impose surrender charges.

California officials have received so many annuity complaints that high-ranking government officials are pushing legislation that would impose additional regulation or oversight of annuity sales. Missouri officials are also pushing for similar actions.

When used appropriately, variable annuities allow seniors an income they can never outlive, but too often, customers do not understand how their annuities work and what the terms are. Despite reports of deception with variable annuities sales, many financial planners believe variable annuities will stand the test of time as more retirees and near retirees search for a guaranteed income stream.

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