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Department of Commerce & Consumer Affairs Business Registration Division Office of the Securities Commissioner Investor Education Program VARIABLE ANNUITIES.

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Presentation on theme: "Department of Commerce & Consumer Affairs Business Registration Division Office of the Securities Commissioner Investor Education Program VARIABLE ANNUITIES."— Presentation transcript:

1 Department of Commerce & Consumer Affairs Business Registration Division Office of the Securities Commissioner Investor Education Program VARIABLE ANNUITIES 8/21/2007

2 VARIABLE ANNUITIE$ State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

3 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

4 “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

5 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

6 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

7 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

8 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

9 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 $

10 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…

11 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 T1T2

12 Know Your Product Time before Payout Find 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 T1T2T3

13 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

14 Know Your Product Rate of Return Watch 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

15 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

16 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

17 Know Your Product Free Look Period Give 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

18 Be Wise - Tips Rollover Before 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

19 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

20 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

21 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

22 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

23 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

24 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? CFPChFCPFSCFACIC CSASSSERA State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

25 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 AbbreviationDesignationOrganization 1CFPCertified Financial Planner International Board of Standards and Practices for Certified Financial Planners, Inc. 2ChFCChartered Financial Consultant American College 3PFSPersonal Financial Specialist American Institute of Certified Public Accountants 4CFAChartered Financial Analyst Institute of Chartered Financial Analyst 5CICChartered Investment Counselor Investment Counsel Association of American, Inc.

26 These are NOT recognized financial expert designations under the state securities laws. AbbreviationDesignationOrganization 1CSACertified Senior Adviser Whatever organization they say they’re with… 2SSSenior Specialist 3SESenior Expert 4RARetirement Adviser State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

27 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

28 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

29 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

30 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) Call us to report fraud at HI- SCAMS. Call us for more information (808)

31 FOR MORE INFORMATION Contact our Office: State Of Hawaii Department Of Commerce & Consumer Affairs, Office of the Securities Commissioner 335 Merchant Street, 2 nd Floor Honolulu, HI Website: State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program


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