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more_legal_areas variable_annuitiesThe number of variable annuity sales hit an all time high in 2004, with sales reaching a record $1.65 trillion. Despite sales more than doubling in the past decade, complaints have been mounting, and the annuity business, which has long been criticized by regulators and consumer advocates for misrepresenting its products and preying on senior citizens, is the focus of state and federal regulators in hopes of increasing oversight and scrutiny of some annuity sales.
After the Securities and Exchange Commission and the National Association of Securities Dealers found widespread “weak” practices regarding sales suitability, disclosure, supervision and training in a recent examination of broker-dealers who sell variable annuities, the NASD proposed regulations that would have two major components: disclosure and supervision. Disclosure would require brokers to provide potential buyers of variable annuities summary documents disclosing the product’s material features and major risks in plain English. The proposed rule would also require a broker’s supervisor or manager to double- check whether the sale of a variable annuity was suitable or not.
Even if the proposed rule does not pass, there are ways to protect yourself from ill-fitting investments. To begin with, experts advise prospective buyers to read as much as possible about variable annuities and abusive sales practice before buying such products, and helpful tips can be found on the NASD, SEC and most state insurance regulator Web sites featuring tips on detecting and avoiding abusive sales tactics and plain English descriptions on variable annuities.
Variable annuities are complicated, and understanding the subtle differences can be extremely difficult when the contract is not laid out in simple terms. Potential investors are encouraged to understand the features so that they can determine if the variable annuity is appropriate. Especially when exchanging one variable annuity for another, investors should be able to recognize if the exchange benefits the investor or broker, what the change in surrender period means and if the new features are actually necessary.
A broker should explain important facts when recommending variable annuities, including liquidity issues, such as potential surrender charges and 10% tax penalties and fees that include mortality and expense charges, administrative charges and investment advisory fees, as well as explaining market risk. Should the seniors and other investors decide a variable annuity is appropriate they should also get a second or third opinion. The opinion coming from a fee-only insurance adviser rather than another commission-based broker is recommended, since one of the reasons variable annuities have been sold so aggressively has been attributed to the high commissions.
Investors should also contact their state’s insurance department to determine whether the broker selling the variable annuity or the firm issuing the variable annuity has clean records. Quotes from other product providers should be sought so that investors are aware of their options prior to buying. No investor should just buy without seeing what else is out there first.
The majority of variable annuities have a “free look” period that ranges from 10 to 30 days, depending on the provider. Any investor that feels like they were pressured into buying the variable annuity can use the free look period to reevaluate the product and determine if it is really the best fitting. Any variable annuity investors believing they were the victims of abusive sales should file a complaint at the SEC or NASD, as well as with their state’s insurance or securities regulators.