Variable Annuities, Equity Indexed Annuities and Insurance Products

Many brokers and investment advisors—particularly those employed by banks—have a strong preference for selling insurance products to their clients as form of investment.  One of the reasons insurance products are popular with financial professionals is that they often pay much higher sales commissions than other investments like stocks, bonds and mutual funds.  This creates an inherent conflict of interest between the best interests of the customer and the salesperson.

Variable Annuities

Variable annuities are complex investments that can lock up an investor's funds for many years. Many customers that are sold variable annuities have been misled to believe that, because this is an insurance product, their principal and income are totally secure. Variable annuities offer costly features which are often unnecessary and can reduce the return on investment. Variable annuity charges include: surrender charges, administrative charges, mortality and expense risk charges, and investment advisory fees.  What many unsophisticated investors do not realize is that variable annuities can carry significant investment risk and may not be a suitable choice for them.

In addition to investment risk, there are other factors that make variable annuities a poor choice for many investors, particularly elderly investors or investors who need access to their funds. Variable annuities have high surrender charges with holding periods that can tie up an investor’s funds for as long as eight years or more.  An aggressive annuity salesperson may even convince their customers to unnecessarily switch or exchange their annuities in order to earn additional commissions—even if it is not in the customer’s best interests.  Because variable annuities are already tax-deferred, there is no compelling reason to hold an annuity in a tax-deferred retirement account such as an IRA or 401(k) account.

Variable annuity investments are particularly unsuitable for customers that have one or more of the following characteristics:

       
  • Are elderly (see Elder Financial Abuse)
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  • Have a low risk tolerance;
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  • Need access to cash or require income;
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  • Do not need or want the available death benefit; or
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  • Already have adequate life insurance coverage prior to purchasing the annuity

Equity Indexed Annuities

Concerns about the predatory sale of equity indexed annuities (EIAs) have been on the rise. EIAs have many of the same characteristics as variable annuities (discussed above).  Both are complex investments that promise “guaranteed” minimum payments, which vary depending upon the performance of the investment.  EIA investors can lose money on their investments if the index linked to their annuity declines.  Also, like variable annuities, EIAs penalize investors who need to redeem or withdraw funds early.

Insurance Products

Stockbrokers and investment advisors offer life insurance policies as investment vehicles. Certain insurance policies, such as variable universal life insurance and variable life insurance policies are considered securities that are subject to state and federal securities regulations.

An overly aggressive stockbroker or financial advisor may recommend that an investor buy too much insurance or that they use the funds from an existing insurance policy or investment portfolio to pay the premiums on a new life insurance policy.  This type of “financing” may not be suitable for all investors and could have negative tax implications.  Also, if an investment portfolio that is used to “finance” the life insurance policy performs poorly, the customer will have to pay the premiums out of their own pocket or else risk losing insurance protection.  A stockbroker or investment advisor that recommends insurance products to their customers has a fiduciary duty to act in the best interest of their customer, to recommend the appropriate amount of insurance, and to disclose the commissions the salesperson will earn.