7.7 Variable Annuities
The variable annuity came to fruition to negate the loss of purchasing power built into the fixed annuity. Inflation takes its toll over time, and purchasing power gets relatively less and less as time goes by. The same annuity payment a person receives in the year 2000 would not be as generous in the year 2010 in terms of what the average dollar can buy. The characteristics of common stock make them a suitable form of investment for variable annuities. Common stocks represent shares of business ownership and they tend to change in value with changing economic conditions. The variable annuity is tied to the ups and downs of common stock and can therefore be used as a hedge against inflation. However, the correlation is subject to fluctuation as the economy changes.
Can the variable annuity be written on employee groups as well as individuals?
Yes, it can, with each covered employee being included under the group variable annuity contract issued to the employer.
The SEC restricts the sale of group variable annuity contracts in the case of a life insurance company that is not registered as an investment company to qualified retirement plans.
A variable annuity offers a plan:
- for lifetime annuity income;
- that should be undertaken only as a long-term program;
- based primarily on equity investments; and
- to provide payments that can change monthly in dollar amount.
The variable annuity has no minimum guarantee of growth. In fact, the death benefit is the only guarantee. The death benefit states that if the policyowner dies within a certain time and before annuitizing the funds, the company will return at least the principal amount invested. The death benefit waiver passes on the annuity to the beneficiary if the annuity holder dies before receiving annuity payments.
The ultimate purpose is to provide an annuity income that will maintain its purchasing power even in inflationary times. Premiums paid for variable annuities go into separate accounts where the company is permitted more investment freedom than in its general fund accounts. Separate accounts are generally invested in common stocks and other securities expected to increase in value as prices increase. However, variable annuities are not a perfect hedge against inflation by any means. Even though the long-run relationship between stock portfolio performance and general price levels has been significant, there have been short-run inconsistencies.
Variable annuities offer plans for lifetime annuity income and should only be undertaken on a long-term basis. Since variable annuities are primarily based on equity investments, monetary benefits can change monthly. Some companies include a loan provision; depending on tax qualifications. Some group contracts do not permit a loan provision. The variable annuity can also be written with waiver of premium or term insurance riders, which would only apply to the accumulation period of a deferred variable annuity.
Agents who want to sell variable annuities must be properly licensed by the state after examination in both the life and variable annuity areas, and be appointed as a life including variable annuity insurance agent by the insurance company underwriting the risk. No person may sell variable annuities in Florida unless first duly licensed and appointed as a life including variable annuity agent. A life including variable annuity agent is one representing an insurer as to life insurance and annuity contracts.
Variable annuities, like other variable insurance products, are subject to dual regulation by the state and the SEC as securities. Insurers selling variable annuities are still subject to regulation by the state's Office of Insurance Regulation, but the annuity itself is regulated as a security. The common stock accounts backing variable annuities as open-end investment companies and the sales personnel as security broker-dealers are all under the regulatory control of the SEC.
At the time of presentation, the client must be given a prospectus which provides full and fair disclosure on the nature and purpose of the plan and the risk involved.
What is the purpose and function of the prospectus?
The prospectus is prepared and furnished by the insurance company and reviewed by the SEC. A prospectus contains information about the nature and purpose of the insurance or annuity plan, the separate account and the risk involved. It is a primary source of information for the prospect.
