The sales efforts used by some brokerage firms to sell variable annuities merit scrutiny, particularly when elderly investors are the buyers. Hard-core sales pitches often scare or confuse investors. One such tactic is to claim that a variable annuity will protect investors from their creditors.
While variable annuities may be appropriate in limited circumstances, investors need to be aware of their restrictive features. This includes understanding that substantial taxes and charges may apply if the investor withdraws his or her money early.
Variable annuities offer investment features similar in many respects to mutual funds, a typical variable annuity offers three basic features not commonly found in mutual funds:
– Tax-deferred treatment of earnings;
– A death benefit; and
– Annuity payout options that can provide guaranteed income for life.
The variety of features offered by variable annuity products can be confusing. Here are seven factors an investor should consider before investing:
1. Liquidity and Early Withdrawals
2. Sales and Surrender Charges
3. Fees and Expenses
5. Bonus Credits
7. Variable Annuities within IRAs
Variable annuities can be incredibly complicated products with huge front-loaded commissions for a broker. An investor broker should not buy a variable annuity without understanding the factors above, including getting any material representations in writing. Further, an investor needs to make sure the investments in the underlying sub-accounts are suitable.