Variable annuity and variable life insurance products can only be sold by financial advisors who hold an insurance license and a securities license, known as dual licensed agents. This is because separate accounts managed by an insurance company are invested in sub accounts which are similar to mutual funds and are considered investment products. Variable annuity products are invested in accounts segregated or separated accounts that are not subject to the claims of any creditors of the issuing insurance company.
Variable annuities contracts have experienced considerable improvements in contract features. The enhancements in variable annuity contracts, including certain living and death benefits provide contract holders with substantial economic benefits. The living benefits provide enhanced policy contract provisions such as:
- Guaranteed Income Benefit Riders
- Guaranteed Withdrawal Benefit Riders
Due to the complexities of variable annuities, complete disclosure of all relevant benefits and costs need to be disclosed to investors. In the event an investor is considering the replacement of a variable annuity contract with an “enhanced” contract they should consider the following factors to determine the suitability of the transaction:
- any surrender charges and/or bonuses received;
- loss of existing benefits (living or death);
- any increased annual contract costs;
- any increases in the surrender charge period;
- any product enhancements and improvements obtained;
- customer has replaced another variable annuity in preceding 36 months; and
- fund an individual retirement account.
There has been significant growth in the number and amount of variable annuities contracts issued by insurance companies and represent a substantial portion of the retirement assets held by individual investors. Recent developments in the competitive arena for variable annuity contract funds have led to the innovation of bonus annuity products that can result in added costs and extended surrender charge periods. The annuity bonus is designed to provide an offset against any surrender charges incurred from the surrender of an annuity contract with the intention to replace the contract with a new “improved” variable annuity contract. The recommendation to sell an annuity and to replace it with another one should be made only after fully assessing the suitability of the transaction for the customer. There are important factors to consider which require the disclosure all relevant facts related to the replacement transaction.
A financial advisor can review your current annuity contracts and investment portfolio holdings and determine the appropriate use of variable annuities based on your financial plan and investment policy statement designed to reach your True North.
