What Is the Point of a Variable Annuity That Cannot Be Cashed In?

Dallas, TXIn the world of investing, there are people who can tolerate a great deal of risk and those who cannot. When it comes to people purchasing a variable annuity, many people purchase the annuity because they believe the annuity to be a safe, guaranteed investment. As such, people who are close to retirement may be purchasing variable annuities, not realizing the annuities might be entirely unsuitable for them. Or, worse, not knowing that the insurance companies that back the annuities might walk away from them. Because they are so close to retirement, losing that money can have a dramatic effect on their financial stability, which is why they often go with low risk investments.

Some insurance companies have allegedly not been able to make their annuitization obligations to people who purchased variable annuities. Variable annuities are sold as a product that will guarantee a lifetime stream of income for investors. Investors purchase the annuity, and after a certain amount of money is invested in the annuity (which can be put in immediately or over a period of time), the investor then receives periodic payments from the annuity. If the companies backing the annuities cannot meet their financial obligations, however, the investors may not ever see that stream of income.

When the insurance companies cannot meet their financial obligations, they may request that the investor put more money into the annuity before it is annuitized (cashed out) or they may request the investor sign a document promising to never annuitize the investment.

The problem is that many retirees and people nearing retirement count on that guaranteed stream of income for their retirement years. They plan their finances based on the money they expect from their variable annuities.

And with any investment, there is risk; but if investors were not told the true nature of the risk when they purchased the investment, then they could not make a fully informed decision about where to put their money. For example, many retirees are encouraged to take a full payout on their pension, rather than receiving their pension monthly. When they get a lump sum, they might be pushed to put that money into an IRA variable annuity, but are not told about all the extra fees of the variable annuity, nor that there is no additional tax benefit to the variable annuity.

The risks and fees associated with an investment are vital information for an investor to have. And if a company promises a guaranteed lifetime stream of income and fails to deliver, it could be violating a contract with the investor, leaving the investor to decide what to do.