Variable Annuities and You

During a recent NAIFA EduCall, a veteran producer shared what you need to know about marketing these flexible financial tools.

By Helen Thompson

UPCOMING EDUCALLS NAIFA Educalls are affordable, educational conference calls that allow you to learn from some of the best in the business—without leaving your home or office. For more information, to register for an upcoming call or to purchase CDs of past EduCalls, visit http://www.naifa.org/benefits/education/educalls.cfm Wednesday, Sept. 20, 3 p.m. (ET) Tax Trap Avoidance in the Senior Market Presenter: Gregory B. Gagne, ChFC, LUTCF Understand the issues that concern retirees and how you can become their trusted advisor. Discover how to help your clients avoid tax traps and leverage their IRA nest eggs. Wednesday, Oct. 18, 3 p.m. (ET) Year-End Tax Planning Presenters: H. Larry Fortenberry, CPA, CLU, ChFC Keith M. Gillies, CLU, ChFC, CFP Stuart G. Tugman, CLU, ChFC, FLMI, AEP Robert L. Weigner, CLU, LUTCF Learn how to develop strategies for using year-end planning sessions to solidify existing client relationships and create new opportunities to serve your clients. Wednesday, Nov. 15, 3 p.m. (ET) Protecting Your Business (E&O Insurance) Presenter: Ross Jordan, CPCU Understand the most common causes of E&O claims and know what to consider when determining your coverage and deductibles.

The controversy surrounding annuities is far from over. In a recent NAIFA EduCall, Dan Strain highlighted some of the concerns held by the National Association of Securities Dealers and the Securities and Exchange Commission for an audience of several dozen callers. “Variable annuities aren’t the problem,” said Strain. “It’s the way that they are marketed that’s the problem. NASD is proposing disclosures and suitability rules for variable annuities … but we have enough rules, standards and procedures. If we would just follow these consistently, my compliance officer thinks [the problem] will pass.”

During Strain’s 33 years in the business, he’s earned numerous degrees and designations, including M.S.F.S., Ph. D., CLU, RFC, CSC, CFS, CAS, CEPS and RHU. In that time, he’s seen many things—except the compliance and suitability issues surrounding VAs that he has seen recently. “I always thought the NASD and the SEC were interested in [annuities] because the product typically pays a higher commission,” he said. “Unfortunately, I was called in as an advisor on four cases already this year because of potential abuse and problems with variable annuities. I was astonished at what was done to elderly clients, aged 68 and older.”

That said, he’s concerned about how much everyone seems to focus on the negative aspects of VAs when the products have so many positive features.

What is a variable annuity?
Strain started with the basics, explaining that a VA is a contract between a client and an insurance company. The client purchases a VA, either in a single- purchase payment or in a series of payments. The insurer agrees to make payments to the client either immediately or at a later date.

What makes the VA special, Strain continued, is that it offers a tremendous range of investment options. Of course, the value of the investments in the VA varies according to the actual performance of the investment options that the client chooses. VAs are similar to mutual funds in that they invest in stocks, bonds and other market instruments. But they are significantly different from mutual funds in several ways, according to Strain:

- They allow the client to receive payments for the rest of his life, which prevents him from outliving his assets.

- They have a death benefit. If your client passes away before he receives benefits, his beneficiary will receive a specified amount—which is at least the amount the policy owner paid for the VA.

- They are tax-deferred. The client pays no taxes on the investment gains and transfers until the time he withdraws the money.

Dealing with compliance
You will encounter a lot of red flags when dealing with VAs, so the best way to handle them is to let a specialist keep an eye on them, noted Strain. “You need to establish a good relationship with your compliance officer,” Strain said. “He can help you accomplish things with regard to marketing VAs that you wouldn’t be able to do on your own.”

Strain said that NASD and SEC have asked a major insurance company to do market research and develop suitability standards for equity indexed annuities and VAs for the senior market. “This should be interesting,” he said. “By December this year, EIAs will fall under the jurisdiction of NASD as well.”

Regulators have taken a lot of action to combat misconduct related to VAs. “From 2002 to 2004, there were 80 disciplinary actions,” said Strain. “Since then, there have been hundreds of disciplinary situations. We have to be careful when we’re making recommendations.”

Proper usage is key
“VAs are wonderful products, but there are certain areas we should stay away from,” Strain added. “One of them is placing VAs in the qualified money of an older client.” He recommended 10-, 12- and 15-year growth terms, noting that like any other retirement product, there should be an accumulation and a payout phase. VAs are retirement products, designed to be long-term investments. “I don’t think that VAs are suitable for meeting short-term goals because of taxes and insurance company charges. If you withdraw the money early, you are subject to a large penalty. And VAs are subject to investment risk.” But for the right client, VAs offer security in the long run.

Strain’s EduCall presentation, “Annuities: Rules and Regulations” is available on CD. To purchase the CD, visit http://naifa.org/benefits/education/educalls.cfm.

 

 

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