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CONSUMER ALERT
MIKE COX
ATTORNEY GENERAL
The
Attorney General provides Consumer Alerts to inform the public of unfair,
misleading, or deceptive business practices, and to provide information and
guidance on other issues of concern.
ANNUITIES - ARE THEY THE RIGHT INVESTMENT FOR
ME?
Today's
financial marketplace offers a broad array of investment products. Choosing the
most suitable product - in light of your age, other investments, and current
economic situation - is not an easy decision. Adding to this difficulty is the
money to be made, in the form of commissions and other compensation, by those
selling investment products. Unfortunately, sometimes this financial incentive
may outweigh concerns about whether the product being sold is appropriate for
your situation. At worst, this financial incentive can lead to less-than-full
disclosure or outright misrepresentations about the terms and conditions
applicable to the product being sold. Even if there has been full disclosure,
failing to completely understand an investment product before purchasing it can
result in you paying unnecessary taxes, early withdrawal penalties,
administrative fees, and other expenses that could have been avoided.
One
investment product of special concern, particularly for senior citizens and
those approaching the age of retirement, is the annuity. Generally, annuities
are sold by insurance companies and constitute an agreement where you make a
lump-sum payment or series of payments in return for the insurer's agreement to
make periodic payments to you beginning either immediately or at some future
date. These periodic payments may last for a definite period (for example, 20
years) or an indefinite period, such as your lifetime or the lifetime of you and
your spouse.
FIXED AND VARIABLE ANNUITIES
Annuities come in two basic forms - fixed and variable. A
fixed annuity guarantees payment by the insurance company of a minimum rate
of interest and periodic payments in a definite amount per dollar invested in
your annuity account. In contrast, a variable annuity allows you to
allocate your purchase payments among a range of different investment options or
"subaccounts" within the annuity, usually mutual funds. With a variable
annuity, the rate of return on the amounts you invest and the amount of the
periodic payments that you receive will vary depending upon the performance of
your investment selections within the annuity. There is, therefore, no
guarantee that the money you invest in a variable annuity will earn any return,
and there is a risk that your investment will decline in value.
EQUITY INDEXED ANNUITIES
An
equity-indexed annuity is a special type of contract between you and an
insurance company. During the accumulation period - when you make either a lump
sum payment or a series of payments - the insurance company credits you with a
return that is based on changes in an equity index, such as the S&P 500
Composite Stock Price Index. The insurance company typically guarantees a
minimum return. Guaranteed minimum return rates vary. After the accumulation
period, the insurance company will make periodic payments to you under the terms
of your contract, unless you choose to receive your contract value in a lump
sum. For more information about equity-indexed annuities, see information
provided by the U.S. Security and Exchange Commission (SEC) at
http://www.sec.gov/investor/pubs/equityidxannuity.htm.
"FREE LOOK" PERIOD
Michigan law requires most annuity contracts delivered or issued for delivery in
this State to provide a "free look" period of at least ten days during which you
may cancel the contract without paying any surrender charges and receive a
refund of any premium paid for the contract, including any policy fee or other
charges. The "free look" period begins from the date that the purchaser
receives the annuity contract. If you sign a document indicating that you have
received the annuity contract, make sure that you have the contract in hand -
otherwise, your "free look" period may be running even though you do not have a
copy of the contract to review.
Throughout the "free look" period, you may continue to ask questions to ensure
that you understand the annuity contract and to ensure that the investment is
right for you. If you decide that you want to cancel the annuity contract
during the "free look" period, you must surrender the contract to the insurance
company by mailing or delivering it to the company's home or branch office or to
the agent who sold you the annuity. In addition to surrendering the contract
itself, you must provide the insurance company with a written request to cancel
your annuity contract.
ADVANTAGES AND DISADVANTAGES
Under
certain circumstances, an annuity can be an appropriate product for your
investment portfolio - it offers tax-deferred growth of earnings and provides a
regular income stream once the periodic payments begin. Annuities also
typically provide for the payment of a death benefit that will pay your
beneficiary a guaranteed minimum amount upon your death.
However, there are restrictive features of annuities that may render them
ill-suited to your investment needs, especially if you are a senior citizen or
nearing retirement age. In particular, the periodic payments to be made under
an annuity may be delayed until a date far off in the future. This type of
delayed-payment annuity is called a deferred annuity, as contrasted with
an immediate annuity where the periodic payments begin immediately.
Additionally, annuities carry several charges and fees that reduce the value of
your investment and should be fully understood before you decide to purchase.
Among these charges and fees are surrender charges that apply if you
withdraw the money invested in the annuity within a certain time period after it
is purchased. These surrender charges operate as "early withdrawal" penalties
and may be significant - as much as 25% on withdrawals made within the specified
period. Withdrawals from an annuity before you reach the age of 59½ are also
generally subject to a 10% tax penalty, in addition to any gain on your
investment being taxed as ordinary income (as opposed to a capital gain). The
period during which these surrender charges apply, or surrender period,
may also be long in duration - up to 20 years after you purchase the annuity.
Features such as these make annuities a long-term investment option that
typically cannot be used for immediate financial needs without substantial
penalties. For this reason, annuities often are not appropriate investment
products for senior citizens, who will not realize any benefits from their
investment for many years. In addition, if you are funding the purchase of an
annuity by liquidating other assets such as stocks or certificates of deposit,
you may incur tax, early-withdrawal, and other penalties in connection with this
liquidation process. These "liquidation costs" should be carefully considered
as part of the equation when deciding to purchase an annuity. Finally, the
tax-deferred earnings offered by annuities may not be necessary for senior
citizens who have limited incomes and pay little or no taxes.
SENIOR CITIZENS GET THE HARD SELL
Stories
about unscrupulous sales of annuity products to elderly and otherwise unsuitable
customers are abundant. Sellers of these products often use hard-sell
techniques and scare tactics to convince unwitting senior citizens to buy
annuities that will lock up their retirement savings for 20 years or more. To
make matters worse, the commissions paid by insurance companies for the sale of
annuities are generally higher than those paid for other investment products,
providing annuity salespersons with a strong personal financial incentive to
sell their products, irrespective of whether they represent a sound investment
choice for their customers? needs.
PRECAUTIONS TO TAKE BEFORE PURCHASING AN ANNUITY
Whenever you are approached to invest your money in an annuity product, be sure
to observe the following precautions:
-
Consult with an independent financial advisor and/or attorney before
purchasing an annuity or similar investment product.
-
Remember that the person selling you an annuity will personally profit from
your purchase of the annuity and may not have your financial best interests in
mind. Any estate planning attorneys or other individuals working with the
annuity salesperson may also have a financial interest in selling you an
annuity product. Ask the annuity salesperson and anyone else he or she is
working with whether they will be paid a commission or other compensation for
selling you the annuity and, if so, how much they will be paid.
-
Bear
in mind that annuities are long-term investments that will generally tie up
the amounts you invest for a significant period of time. If an emergency
occurs and you need to withdraw money from the annuity early, the amount
withdrawn may be subject to large surrender charges and tax penalties. Ask
the person selling you the annuity about the time period during which these
"early withdrawal" penalties apply, as well as how much they will cost you.
-
If
you are considering purchasing a variable annuity, ask about the risks that
your investment could decrease in value.
-
Ask
about any other fees and expenses that will be charged by the annuity you are
considering purchasing, including mortality and expense risk charges,
administrative fees, underlying fund expenses, and "special
feature" charges for benefits such as stepped-up death benefits, bonus
credits, guaranteed minimum income benefits, and long-term care insurance.
-
If
you are funding the purchase of an annuity by liquidating other assets such as
stocks or certificates of deposit, carefully consider the tax,
early-withdrawal, and other penalties that you will incur when liquidating
those assets.
ADDITIONAL INFORMATION ABOUT VARIABLE ANNUITIES
Because
of the investment risk associated with variable annuities, they are classified
as securities and are regulated by the SEC. Certain equity-indexed annuities
are also securities regulated by the SEC, while fixed annuities are not
securities regulated by the SEC. You can learn more about variable annuities in
the SEC's publication, "Variable Annuities: What You Should Know," available at
www.sec.gov/investor/pubs/varannty.htm, or by calling the SEC toll-free at
1-800-SEC-0330 (1-800-732-0330). Additional investor information is available
at the SEC's homepage:
www.sec.gov.
In addition,
the National Association of Securities Dealers (NASD), an independent
self-regulatory organization charged with regulating the securities industry
including sellers of variable annuities, maintains a Web site containing alerts
and other information about variable annuities. The NASD Web site is:
www.nasd.com.
COMPLAINTS
Michigan's
Office of Financial and Insurance Services
Insurance
companies and agents doing business in Michigan must be licensed with the
Michigan Office of Financial and Insurance Services (OFIS). To find out if an
insurance company or agent is licensed in Michigan, you may contact OFIS by
telephone at 1-877-999-6442, or you may obtain this information from the OFIS
Web site at
http://www.michigan.gov/cis/0,1607,7-154-10555---,00.html. Any complaints
regarding the sale of an annuity product by an insurance company, insurance
agent, or any other business or individual should be sent in writing to OFIS at
the following address:
Michigan
Office of Financial and Insurance Services
Consumer
Services Division
P.O. Box 30220
Lansing,
Michigan 48909-7720
A copy of OFIS'
Insurance Complaint form is also available online at:
http://www.michigan.gov/documents/cis_ofis_comp_all_25074_7.pdf.
U.S.
Securities & Exchange Commission
You can also
contact the SEC with complaints about variable annuities and equity-indexed
annuities. There are several ways to file a complaint with the SEC:
If you do not
want to communicate electronically, either print and fill out a form (again
available at:
www.sec.gov/complaint/selectconduct.shtml) or write a letter, then send or
fax the form or letter to:
SEC Complaint
Center
100 F Street,
N.E.
Washington,
D.C. 20549-0213
Facsimile:
202-772-9295
ATTORNEY
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