Palm Beach, Florida Investment and Securities Fraud and Mismanagement FINRA Arbitration and Litigation Attorney Russell L. Forkey, Esq.
A popular investment vehicle that is available in the marketplace is an annuity. There are two basic types of annuities, fixed annuities and variable annuities. Fixed annuities are usually “fixed” in two ways: (1) the amount you invest earns interest (tax-deferred) at a guaranteed rate while your principal is guaranteed not to lose value, (2) when you withdraw or elect to “annuitize” (begin taking monthly income) you receive a guaranteed amount based on your age, sex and selection of payment options.
Variable annuities, in contrast, are generally “variable” in two ways: (1) the amount you put in is invested in your choice of any number of sub-account mutual funds, including stocks, fixed income bonds or money market funds, which vary with market conditions; and, (2) market value determines the amount that is available for withdrawals, or (with actuarial factors) the amount the annuitant is paid from one month to the next.
Before you buy a fixed or variable annuity, you should know some of the basic terms associated with the proposed investment. Because this type of investment is contract-based, make sure that you spend whatever time is necessary for you to completely understand what the contract says and in practicable terms how it will apply to your unique circumstances. Remember, it is not unheard of that account executives or other financial professionals will make fraudulent or negligent misrepresentation and/or omissions to get a client to purchase an annuity or to exchange one annuity for another because of the large commission associated with such a transaction.
By way of example, we have represented clients who where induced to exchange one annuity for another. As an inducement to get the client to approve the transaction, the financial professional told the client that the annuity that he was purposing the client to exchange into paid a bonus of X dollars and offered a few options that the client’s original policy did not. However, what was not disclosed was that because the surrender period had not expired on the first annuity, the amount of the bonus was less than the surrender charge and that the client’s surrender period would start all over again. This is especially egregious as the client’s age increases. Also, if it represented that the exchange will be tax free (a 1035 exchange) verify this as well as the cost of the new annuity options that are being presented to you and whether or not you need these new options.
Make sure that you request and carefully read the prospectus issued by the insurance company before finalizing your purchase. This will allow you to make sure that what your financial professional is telling you is accurate and it will give you time to read the document, become familiar with its terms and to make sure that it is right for you. Don’t jump at the first product that is presented to you. Compare it with annuities presented from other companies, which your financial professional or his firm might not have a selling agreement with.
With the above said, this post is a general description of some “key” terms that you will be exposed to when discussing or considering an annuity. Please keep in mind that this information is being provided for general informational purposes only and is not to be considered legal or investment advice. Any questions that you might have concerning an annuity should be directed to an appropriate professional. However, if you believe that you have been fraudulently or negligently induced into purchasing a fix or variable annuity, call the law office of Russell Forkey for your free initial consultation.
What is an annuity?
An annuity is a contract between an insurance company and an annuitant, whereby the company, in exchange for a single or flexible premium guarantees a fixed or variable payment for the annuitant at a future time. Immediate annuities begin paying out as soon as the premium is paid. Deferred annuities, which may be paid for in a lump sum or in installments, start paying out at a specified date in the future.
Below are some of the terms that you must be alert to and have a general understanding of:
The annuitant — The annuitant is the person on whose life expectancy the annuity payments will be calculated. If and when the owner decides to start taking a guaranteed lifetime income from the annuity, the size of the (typically monthly) annuity payments are based on the annuitant’s age and life expectancy — not the owner.
The owner — The owner of the annuity is just that. This person pays the premiums, signs the application, agrees to abide by the terms of the contract, decides who the other parties of the contract will be, can withdraw money or even sell the annuity (depending on a number of factors such as the type of the policy or the stage it is in), and is liable for any taxes that are due.
The beneficiaries — The beneficiaries are the persons designated to receive assets upon someone else’s death. When filling out an annuity contract application, the owner names his own beneficiary and also the annuitant’s beneficiary. The owner and the annuitant can be each other’s beneficiary.
The issuer — The insurance company that issues the annuity contract.
What are some common elements of most annuities?
All annuities have a free look period, a death benefit, guarantees and annuitization options. Most of them also have surrender periods. To summarize each:
Free-look period — When you buy an annuity, you have between 10 and 30 days to cancel the contract after you receive it in the mail. Some immediate annuity contracts let you cancel your contract within the first six months.
Death benefit — If the owner of the contract dies (or, in some contracts, if the annuitant dies) his or her beneficiary receives a “death benefit,” paid in accordance with the death benefit option the owner chose when the contract was purchased. For example, the death benefit may be equal to, among other options, (1) the value of the investments in the contract when the annuitant dies, (2) the amount of the original investment, if it is higher than the value of the investments when the owner or annuitant dies, or (3) the highest value of the contract on any contract anniversary, if it is higher than the original investment.
Surrender periods — Most, but not all, annuities have surrender periods, which is a period of time when the issuer may levy a contingent deferred sales charge if the owner withdraws too much money too soon. Almost all deferred fixed annuities have contingent deferred sales charges; so do most deferred variable annuities that are purchased from agents or brokers. If you bought from a salesperson and that salesperson earned a commission, your contract has a contingent deferred sales charge.
Under certain circumstances, most annuity contracts do provide some circumstances under which you can withdraw money during the surrender period without paying this charge. Make sure that you understand when, if at all, your policy allows these withdrawals.
Annuitization options — To annuitize a deferred annuity means to convert the value of the investments in the contract to a guaranteed income stream for usually a specific number of years, the rest of your life or as long as you or your spouse is living.
In general, annuities are for long-term investors willing to trade liquidity and some degree of return for safety and tax-deferred capital growth, and whose objective is to defer taxability until later or to guarantee retirement income.
With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.