Variable Annuities
Variable annuities are complex investments combining features of insurance contracts and mutual funds. As such, they are subject to state insurance laws and the securities laws.
The mutual funds are held in “sub-accounts” and are subject to market risk just like other mutual funds. However, with variable annuities, one pays both for the mutual fund expenses and the additional charges to maintain the annuity contract. These securities are highly expensive. In problem cases, we see that the multitude of charges have been hidden or not properly explained to the investor.
Variable annuities can provide immediate payouts, or deferred payouts. In the more common deferred variable annuities, the payout phase of the investment begins at a later date after the investor has paid in to the contract either as a lump sum investment or through a series of installment payments. Guaranteed payments are often touted, though this feature does apply until the contract is ‘annuitized’ many years, sometimes decades, after purchase and after the value of the investment may have declined. Withdrawal penalties apply for payments received during the first several years of the investment. In addition, the withdrawals are subject to ordinary income tax rates, rather than capital gains rates that would be available if invested directly in mutual funds or other securities.
While variable annuities may be appropriate for some portfolios, these investments have been fertile ground for broker sales practice abuses, particularly among retirees or those approaching retirement. You can read what the regulators have written about variable annuities at
http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/AnnuitiesAndInsurance/P005976.
Even some Wall Street professionals dislike deferred variable annuities due to the high costs that can be avoided, lack of guaranty despite promises, and more. You can read one such article published by Forbes.com at http://www.forbes.com/sites/feeonlyplanner/2012/07/02/9-reasons-you-need-to-avoid-variable-annuities/.