department of commerce & consumer affairs business registration division office of the...

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


“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


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.


How does it work?

You pay the insurance company a lump sum or a series of payments.

YOU Insurance Company

$$$$$


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


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”


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


$

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


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.


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.


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.


$ $

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.


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.


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)?


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.


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.


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.


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.


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.


Beware of Charges & Fees

Surrender Charge/Policy Fee Mortality & Expense Risk

Charge Administrative Fee


More Fees & Charges

Underlying Fund Expense Management Fee Distribution & Service Fee Charges and Fees for other

features


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


These are the only recognized financial expert designations under the state securities laws.


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


Be Skeptical – Ask Questions

Ask YOURSELF questions to ensure that you understand what you are investing in and it suits your specific situation.


Be Skeptical – Ask Questions

Ask the SALESPERSON questions to protect yourself from being a victim of investment fraud.


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.


How we can help -


• 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


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