Investors Should Be Wary of Variable-Annuity Swaps

Investors should be wary if their insurance agents, brokers, or financial advisers claim that swapping their older variable annuities for newer ones would be in their best interests. In fact, because of the poor market performance from 2007 to 2009, variable annuities that were purchased before then likely have guaranteed minimum income payments that could offer a better income than either newer annuities or other kinds of investments, according to the article.

Problems with Equity-Indexed Annuities Won't Be Fixed by the SEC

An equity-indexed annuity is a contract between an investor and an insurance company in which the investor agrees to make payments to the insurance company throughout a set accumulation period and the insurance company agrees to make periodic payments to the investor once the accumulation period ends. During the accumulation period, the insurance company takes the payments made by the investor and credits the investor with a return that is based on an equity index (i.e. the S&P 500). Typically, a guaranteed minimum return is promised to the investor.

Variable Annuities Are Problematic as Part of Retirement Plans

Recently, many companies have begun to offer variable annuities as subaccounts in their company retirement plans. Variable annuities are contracts between a purchaser and an insurance company. According to a July 2, 2010 article by Mel Lindauer on Forbes.com, this inclusion is problematic for two main reasons. First, many of the variable annuities placed inside retirement accounts are high-cost non-qualified variable annuities carrying substantial fees including surrender costs. Second, if the retirement account is already tax-deferred (as is the case with most), a variable annuity will not provide the investor with any additional tax benefits.

LPL Financial Sued in ClassAction Over Variable Annuities

Boston-based LPL Financial has been sued by two Nebraska investors in a class action alleging the sale of unsuitable variable annuities in their retirement accounts. The lawsuit alleges that the firm's broker, Bob Bennie, made material misrepresentations regarding the nature, suitability, and appropriateness of a variable annuity within an IRA or qualified retirement plan.

FINRA Statistics Show Surge in Variable Annuity Cases

While overall arbitration filings with the Financial Industry Regulatory Authority (“FINRA”) increased last year, cases involving variable annuity sales increased nearly threefold, rising to 123 cases in 2009 from only 47 in 2008.