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Variable Annuities

By Scott C. Ilgenfritz | Categories: Articles, LitigationPrint PDF March 2017

Variable annuities are complex investment products.  Variable annuities have an insurance component providing for a death benefit and provide for the investment of investor premiums, generally in mutual fund sub-accounts.  Basic features of variable annuities include tax-deferred treatment of earnings, the insurance component or death benefit, and various payout options, some of which can provide guaranteed income for life.  The term “variable” relates to the fact that the ultimate annuity payment will vary depending upon the performance of the mutual fund sub-accounts”.  “Fixed” annuities are also available and have annuity contracts provide for a lower, but fixed, rate of return.

An additional layer of complexity with respect to variable annuities relates to the availability of different share classes of variable annuity contracts, including L-share contracts and B-share contracts.  All variable annuity contracts have a surrender period during which annuity owners pay a surrender charge for a period of years if they withdraw more than the annual maximum amount allowed to be withdrawn from a variable annuity in a given year.  The typical maximum withdrawal amount is ten percent of the value of the annuity.  B-share contracts typically have a surrender period of six to eight years during which the surrender charge declines from six to eight percent to zero after the seventh year.  L-share contracts typically provide for a shorter surrender period at higher surrender rates for a period of three to four years.

Insurance companies that issue annuities levy annual fees for the insurance coverage included in variable annuities (mortality and expense risk charges) and administrative fees for record keeping and other administrative expenses.  In a typical B-share contract, the mortality, expenses, and administrative fees charged on an annual basis are 1.25% of the value of the annuity.  For L-share contracts, those annual fees are typically higher at approximately 1.65%.  The higher fees associated with an L-share contract adversely affect an investor’s return on a variable annuity contract.

Variable annuities are commonly sold to investors as long-term retirement savings vehicles.  However, some investors might prefer the shorter surrender period of an L-share contract to provide flexibility for exchanging out of a variable annuity contract for a better variable annuity product or other investments.

Because the premiums paid by investors who are sold variable annuities are placed in mutual fund sub-accounts, the value of the variable annuity will increase or decrease based upon the performance of the mutual fund sub-accounts into which investor premiums are allocated.  The mutual fund sub-accounts selected by an investor’s stockbroker or investment advisor should be consistent with the investor’s suitability profile, including risk tolerance and investment objective.

In November, 2016, the Financial Industry Regulatory Authority (“FINRA”) levied $6.2 million in fines against six brokerage firms for supervisory failures related to variable annuity L-share contracts and ordered five of those firms to pay more than $6 million to customers who had been sold the variable annuity L-share contracts.  Those firms were VOYA Financial Advisors, Inc.; Cetera Advisors Networks, LLC; First Allied Securities, Inc.; Summit Brokerage Services, Inc.; and VSR Financial Services, Inc.  FINRA found that the above-listed firms had inadequate supervisory systems in place and failed to supervise variable annuity sales, which resulted in millions of dollars of L-share variable annuity contracts being sold to investors with conflicting long-term income riders.

Johnson, Pope, Bokor, Ruppel & Burns, LLP, the law firm with which Scott Ilgenfritz has been affiliated for 33 years, has offices in Tampa, St. Petersburg, and Clearwater, Florida.  The firm’s attorneys have in excess of 70 years experience representing institutional and individual investors nationwide seeking to recover losses suffered by them as a result of the negligence or fraud of financial professionals and their firms.

If you are an investor who has suffered losses in a variable annuity contract sold to you by your stockbroker or investment advisor or who has questions or concerns about the suitability of a variable annuity contract sold to you, please contact Scott Ilgenfritz for a no obligation, no cost consultation regarding potential claims that you may have.


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