A variable annuity is a life insurance contract, a wager on the life expectancy of a person. In return for an investment of an initial lump sum or series of premium payments, the investor begins receiving an income stream at a certain milestone, for instance as the annuitant reaches retirement age. That income stream keeps coming for as long as that annuitant lives. Various configurations, add-on features, and other options can make the advertised returns attractively high, which is the core of the sales pitch.
Potential pitfalls include the sheer complexity of the contract with optional benefit riders, the length of time that the principal may be tied up, fees and other charges that undermine the ultimate payoff, multiple decision-points during the term of the contract, tax benefits that turn out to be redundant, the issuers’ built-in contractual permission to adjust the terms of the deal, and the unattractive returns of the annuity compared to more liquid conventional investments. Many variable annuities have been aggressively sold, because they pay high commissions back to the brokers.
The Director M offering from the Hartford is remarkable for an offer extended from the issuer in January 2013: an offer to buy back the contracts. This is a demonstration that, at least in some cases, the terms of a variable annuity contract can turn to the investors’ advantage.
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