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Variable Annuity Makes Only Variable Sense for Some

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Chicago, ILConsidering variable annuity insurance as an investment? Imagine going to buy a car, and saying to the salesman, "I want a little Honda Fit. Small, good on gas, cheap to run. It's all I need." The reply? "No ma'am, what you need is a Hummer. Four times the cost of a Honda, five times the gas consumption. And when they foreclose on your home, you can live in it." Maybe they'll throw in variable annuity life insurance to go along with it.

Investment RiskVariable annuities, known as equity-indexed annuities (EIA) should be considered, industry experts say, as a niche investment appropriate for only a certain number of investors; if you have time on your side and have no plans at all to redeem the funds early. Investors with other sources of revenue they can draw upon in the event of an emergency also might look to the EIA. If you're loaded and you've got money to burn, then it's a moot point.

But for most of us, variable annuities are a roll of the dice—and if you roll craps, there's no sympathy coming from the house. The variable annuity often features incredibly high redemption fees and penalties for redeeming early. Little wonder that they appeal, and are really only appropriate for a small segment of investors with a profile that allows for time, and other forms of liquidity. However, it has been reported that commissions are so attractive to the brokers selling them that attempts are made to sell these products to investors that don't have the right profile.

The broker doesn't care. He has his money.

One 83-year-old retiree was talked into buying an EIA by an opportunistic sales agent. At 83. According to the contract, he would have access to annual interest earnings, and yes he could withdraw the principle—or portions thereof—together with a redemption penalty of 4 percent. The fact remained, however that the poor man wasn't contractually allowed to redeem the annuity without penalty until the year 2015. By that time he would have been 98.

According to the man's grandson, the investor unexpectedly was diagnosed with terminal cancer and needed to cash the annuity during the 7th year. That's fair. Life happens, after all. The problem was that he still had 8 years left to go in the annuity. After redemption fees and penalties were paid, even combined with annual interest payments the poor man wound up with less than 90 percent of the initial principle. He lost money.

The only person who made money was the agent who sold it to him. And with commissions as high as 8 percent, that's a pretty healthy payday. On a modest $100,000 annuity, that's $8,000. Sell a handful of those annuities a year, and you've just earned yourself a nice car.

Another EIA investor was swayed by the sales pitch for the Allianz MasterDex 10, which at the time featured a 12 percent bonus up-front. 'Simon,' (not his real name) elected to roll his IRA into it. It should be noted that all limitations and requirements are included in the fine print with the contract and marketing materials, but in Simon's case he wasn't even presented with documents until he was sold, verbally, on the idea. He even signed the agreement, without reading the contract.

He did once the agent was gone, and luckily soon enough to realize his mistake. Simon cancelled the annuity within the legal, three-day cooling-off period.

Investment writer Jeffrey Voudrie makes the point that some agents and brokers don't really understand the products they are selling, and that they may be unwittingly leading their clients down a garden path. One broker was blindly selling variable annuities to just about anyone, according to the marketing materials provided to him, like a rat falling in line behind the pied piper. It wasn't until later that an industry watchdog opened his eyes to the limitations, and the unfairness of selling variable annuities to clients for whom they were really not appropriate. He would eventually take his supplier to task on every point of their marketing strategy, before he stopped selling the products altogether.

This is what one couple, Phil and Donna, had to say about variable annuities when they shared their thoughts with Voudrie. "We were stupid enough to be swayed into turning my husband's entire 401k into an EIA. Obviously, if we would have understood what we were getting into, we would have run, not walked, away from this. This is really the Investment from Hell…

"We would like to find out if there is any way out of this mess, without losing almost 25 percent [in surrender penalties]. This policy made 0 percent the first year." Even though the market went up almost 15 percent in 2006, Phil only made 1.5 percent that year.

Variable annuity insurance isn't for everybody, and the investor has a responsibility to ask questions and be vigilant about seeing the fine print inherent with any product, and especially variable annuity life insurance. That said, it is the moral responsibility of the agent or broker to be straight with the client. The motivation should be what is appropriate for the investor, not what is best for the agent. In the end, the agent should know what he is selling—and if the basket of products includes variable annuities, then he should only be bringing out those products to investors for whom they are most appropriate.

Maybe you did sign without fully realizing what you were getting into, and maybe you've missed the three-day grace period. However, if the EIA was misrepresented to you, you may have a claim. You would be well advised to take it up with a variable annuity insurance attorney at your earliest opportunity.

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