Investors Urged to be Careful When Considering Variable Annuities


Variable annuities have long been criticized as one of the worst investment choices ever. Complicated, costly, and Illiquid by virtue of surrender penalties, variable annuities offer investors less benefit than traditional investments that can bought without the expensive insurance company wrapper, according to many experts.

Insurance companies previously countered that criticism by offering more and better guarantees, such as guaranteed lifetime income benefits. In addition, the likelihood (some say inevitability) of rising taxes has made investors think about the tax-deferral features of variable annuities. [Note it is still important for investors to remember that payouts are taxed at ordinary income tax rates].

Today the landscape has changed. The sustained low-interest rate environment has made it difficult or impossible for the insurance companies to hedge the risk of offering rich guarantees and making a profit. Thus, many insurers have curtailed or eliminated the generous guarantees that caused investors to consider variable annuities despite the bad rap.

Investors need to consider these issues when considering variable annuities. Those investors with $2 million to $5 million in assets are the target audience of variable annuity sellers. They can expect to receive sales pitches focusing on the tax deferral benefits of variable annuities. But faced with the curtailment of the guarantees that made them more attractive, more investors are asking questions and not taking these sales pitches at face value according to observers. Annuities are at the top of the list as the most-asked-about investment-related product, according to InvestmentNews (“Clients ask advisers about annuities more than any other product: Survey”), citing data from Cerulli Associates, Inc.

State securities regulators are also cautioning investors to beware of “free lunch” seminars where variable annuities and other alternative investments are sold. While these seminars are advertised as educational, the real goal is the sale of investment products. Some of these seminars are even hosted by advisers who falsify their professional designations and credentials to gain immediate trust, and there is often a real risk of fraud at such seminars, regulators warn.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.