Office of Financial and Insurance Services (OFIS) staff are regularly contacted by Michigan seniors who have purchased variable annuities that are not suitable, considering their financial circumstances.

OFIS Commissioner Linda A. Watters today issued a consumer warning to Michigan seniors encouraging variable annuity buyers to get more information before making a purchase, and to carefully assess whether variable annuity purchases make good financial sense.

One good warning sign is when an agent suggests liquidation of other assets to buy variable annuities. This is an indication that the agent may be putting their interests before the interests of the consumer.

Watters issued this warning to seniors, “Seniors beware – do not purchase a variable annuity unless you have all the information and are sure that they are absolutely right for you.”

A variable annuity is a complex contract between a consumer and an insurance company. Variable annuities offer investment features similar in many respects to mutual funds, but a typical variable annuity offers three basic features not commonly found in mutual funds:

1. Tax-deferred treatment of earnings;
2. A death benefit; and
3. Annuity payout options that can provide guaranteed income for life.

Generally, variable annuities have two phases:

The "accumulation" phase when investor contributions - premiums - are allocated among investment portfolios – sub-accounts - and earnings accumulate; and
The "distribution" phase when you withdraw money, typically as a lump sum or through various annuity payment options. If the buyer chooses to delay payment, the product is called a deferred annuity. If the payments start immediately, it is called an immediate annuity.

As its name implies, a variable annuity's rate of return is not fixed, but varies with value of the stock, bond, and money market sub-accounts that you choose as investment options. There is no guarantee that an account will earn any return on an investment and there is a risk that an account will lose money. Because of this risk, variable annuities are classified as securities and required to be registered with the Securities and Exchange Commission (SEC). Since variable annuities are also an insurance contract, agents selling these products have to hold both insurance and security licenses.

The sales techniques of some sellers of variable annuities have come under intense regulatory scrutiny - especially when seniors are the targeted investors. Sales pitches for these products might attempt to scare or confuse investors. One scare tactic used with seniors is to claim that a variable annuity will protect them from lawsuits or seizures of their assets. Claims such as these are not based on fact, but have been successful in tricking some consumers.

Watters continued, “My warning to seniors would be that this product may not be for you… so check with the OFIS Securities Division and make sure you know all the facts before investing your money,” said Watters.

While variable annuities can be appropriate as an investment under the right circumstances, investors should be aware that they have downsides, including substantial taxes and fees for early withdrawal and the risks that the investment would not perform as well as promised.

Before investing in a variable annuity ask yourself some basic questions:

Have I read, and do I understand, the prospectus?
Do I fully understand the features of the annuity?
Do I understand all the fees and expenses of the annuity?
Can I afford to take the risk that my account value may decrease if the sub-accounts I am invested in don’t perform well?
Is this a long-term investment? Will I need to withdraw money from this annuity before the surrender period is up?
Do I understand the tax implications of owning an annuity?
If your exchanging an old annuity for a new one (often called a “1035” exchange) have I compared all the pros and cons of the exchange?

In addition to asking the agent selling you the annuity the same questions, you might also ask them the following:

1. How are you being compensated for this transaction?

2. Are there other ways to meet my investment objectives?

You may also want to investigate the financial condition of the insurance company issuing the contract. The guarantees provided above the market value your investment would typically be their responsibility to pay.

More information about Variable Annuities, how to evaluate them, and how to protect yourself can be found on the OFIS website at www.michigan.gov/ofis. Variable Annuity information can also be found on the National Association of Securities Dealers website at www.nasd.com in the Investor Alerts section, or at the SEC website at http://www.sec.gov/investor/pubs/varannty.htm. Information about your broker can be found by accessing “check out brokers & advisers” section on the NASD website.

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