In May 2008, new suitability rules went into effect attempting to stop the proliferation of variable annuity complaints. Yet, from all appearances, variable annuities are still being sold to uninformed consumers, many of them elderly, who do not understand what they are getting themselves into–until it is too late.
A variable annuity is a hybrid product that includes both insurance and securities features. Due to their complexity, many customers are at the mercy of their brokers when deciding whether a variable annuity is a suitable investment. Because of the insurance element, many investors wrongly assume that their investment will not lose value.
Variable annuities come with a lot of costly features that are unnecessary for most investors. For many investors, particularly elderly ones, a variable annuity is a poor investment choice that can expose them to unnecessary market risk.
Variable annuity investments are ill-suited for customers that have one or more of the following characteristics:
- Are elderly
- Have a low risk tolerance
- Need access to cash or require income
- Do not need or want the available death benefit
- Already have adequate life insurance coverage prior to purchasing the annuity
When recommending a variable annuity, brokers must make a determination that the entire variable annuity, including its component parts and the initial subaccount allocations, is suitable for the customer. Under the new rules, brokers also have a duty to inform their clients about the material features of any variable annuity product they are recommending. In order to meet this requirement, the broker must do more than merely give the customer a copy of the prospectus.
- Think twice before investing in a variable annuity.
- Never invest in anything that you cannot easily understand.
- Do not rely only on the recommendation of a commissioned broker. Get a second opinion from an independent financial advisor.