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Department of Commerce & Consumer AffairsBusiness Registration Division
Office of the Securities Commissioner
Investor Education Program
VARIABLE ANNUITIES
8/21/2007
VARIABLE ANNUITIE$
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Presentation Agenda
Today we will cover: What is a Variable Annuity? How does it work? About the product: market risk,
timing, tax, death benefits, charges and fees, etc.
Be skeptical – questions to ask How we can help you
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
“Instead of a legitimate sales seminar and a free meal, seniors are being exposed to pitches for unsuitable products, with high-pressure sales tactics and wild claims about projected returns, and no disclosure of the actual risks of the investment.”
Christopher Cox, SEC Chairman
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
What is a Variable Annuity?
It is a contract between you and an insurance company.
The insurer agrees to make periodic payments to you, beginning either immediately or at some future date.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
How does it work?
You pay the insurance company a lump sum or a series of payments.
YOU Insurance Company
$$$$$
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
How does it work? The insurance company will pay
periodic payments to you: monthly, every other month or annually. It’s a periodic payment and that’s why it’s called an annuity.
YOU Insurance Company
$
periodic payments
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
How does it work? BUT…the amount they pay you
depends on the securities market. It varies. It is not fixed. That’s why it’s called “variable”. Your return could be a lot less than you planned for or even zero.
YOU$
You may get as little as “$0”
insurance company
securities market risk
$
If the market returns “$0”
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
How does it work? Timing: 2 Types of Variable Annuities
1) Immediate Payout – You buy it today, you can start getting first periodic payments tomorrow.
YOU
$
insurance company
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
$
How does it work?
2) Delayed Payout – You buy it today, you can start getting first periodic payments some time in the future.
YOU$ insurance
company
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
YOU$ insurance
company
Years later…
Know Your Product• Surrender Costs/Policy Fees
Surrender periods fall during the time you first pay the insurance company and when you finally get a payout.
Most annuities have expensive surrender charges if you try to withdraw money early before the surrender period ends.
If you need the money sooner and you want to take your money back, you’ll often pay a big surrender charge.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
You pay now Surrender Period
T1 T2
Know Your Product
• Time before PayoutFind out how long it will be before any payout happens.
If you are 85 and the variable annuity doesn’t start to payout for 15 years, you don’t get a payment until you are 100.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
You pay now Surrender Period
T1 T2 T3
Know Your Product• Market Risk
Remember a variable annuity means the amount that actually gets paid out to you varies depending on the market.
A variable annuity is tied to underlying investments. If those underlying investments perform poorly in the market, you could end up with much less than you thought.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
$ $
You may get as little
as “$0”
insurance company
securities market risk
If the market
returns “$0”
YOU
Know Your Product
• Rate of ReturnWatch out for introductory or teaser rates that are a lot higher than the actual rate of return specified in the contract.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Know Your Product
• Tax Benefit
It is important to remember that the tax benefit of deferring tax on income is very small for most people and not worth the risk for a variable product.
It really only makes an impact for very wealthy people who wish to lower their tax bracket in their future and can also withstand a market risk.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Know Your Product
• Death Benefit
Understand what happens to the proceeds of your annuity upon death.
If you die, what does your beneficiary really receive?
i) all the money in your account?ii) some guaranteed minimum
(all purchase payments minus withdrawals)?
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Know Your Product
• Free Look PeriodGive yourself time to think about the purchase.
Variable annuity contracts typically have a “free look” period of ten or more days, during which you can terminate the contract without paying any surrender charges and get back your purchase payments.
You can continue to ask questions in this period to make sure you understand your variable annuity before the “free look” period ends.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Be Wise - Tips
• RolloverBefore cashing in one investment to purchase another, make sure the benefits of the purchase outweigh the costs such as additional commissions, surrender costs/policy fees, penalties and tax liabilities.
INVESTOR ALERT:Switching annuities frequently benefits the SALESPERSON more than the investor due to commissions.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Be Wise - Tips
• Suitability
Make sure an annuity is something
you can afford and is an appropriate
investment for your age and financial
situation.
INVESTOR ALERT:If you are over 65 years old, variable annuities with surrender period and delayed payout are
probably NOT for you.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Be Wise - Tips
• Know your Salesperson:
Do not do business with anyone who tries to scare or pressure you to buy.
INVESTOR ALERT:You should be completely comfortable with the product and the salesperson before you commit any of your hard-earned money.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Beware of Fees & Charges
• Variable Annuities may have lots of continuing fees and charges.
INVESTOR ALERT:The charges will reduce the value of your account and the return on your investment.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Beware of Charges & Fees
Surrender Charge/Policy Fee Mortality & Expense Risk
Charge Administrative Fee
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
More Fees & Charges
Underlying Fund Expense Management Fee Distribution & Service Fee Charges and Fees for other
features
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Beware of Senior Designations Beware of “senior” or “elder” designations
or credentials. Credentials can be misleading.
-Which ones are financial expert designations recognized under the securities laws?
-Which ones are not?
-Can you tell the difference?
CFP ChFC PFS CFA CIC
CSA SS SE RA
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
These are the only recognized financial expert designations under the state securities laws.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Abbreviation Designation Organization
1 CFP Certified Financial Planner
International Board of Standards and Practices for Certified Financial Planners, Inc.
2 ChFC Chartered Financial Consultant
American College
3 PFS Personal Financial Specialist
American Institute of Certified Public Accountants
4 CFA Chartered Financial Analyst
Institute of Chartered Financial Analyst
5 CIC Chartered Investment Counselor
Investment Counsel Association of American, Inc.
These are NOT recognized financial expert designations under the state securities laws.
Abbreviation Designation Organization
1 CSA Certified Senior Adviser
Whatever organization
they say they’re with…
2 SS Senior Specialist
3 SE Senior Expert
4 RA Retirement Adviser
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Be Skeptical – Ask Questions
Ask YOURSELF questions to ensure that you understand what you are investing in and it suits your specific situation.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Be Skeptical – Ask Questions
Ask the SALESPERSON questions to protect yourself from being a victim of investment fraud.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
Be Skeptical – Variable annuities are complicated,
hard to understand, often may have hidden fees and charges and have market risk.
They vary from contract to contract.
If you aren’t sure or can’t understand all of it, don’t invest.
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
How we can help -
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program
• Call us to check if your broker dealer or investment adviser is properly registered with the State (808) 586-2722.
• Call us to report fraud at 1-877-HI-SCAMS.
• Call us for more information (808) 587-7400.
FOR MORE INFORMATION
Contact our Office:
State Of HawaiiDepartment Of Commerce &
Consumer Affairs,Office of the Securities
Commissioner
335 Merchant Street, 2nd FloorHonolulu, HI 96813
Website: www.investing.hawaii.gov
State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program