Variable annuities expert witnesses may testify on retirement annuities, wraparound annuities, variable annuities, and more. In VARIABLE ANNUITIES: A PRIMER FOR CLAIMANTS’ COUNSEL, John Duval Associates writes on annuities sales practices:
Variable annuities are a notorious vehicle for abusive sales practices. The reason many brokers are prone to commit these abuses is that the combined commissions from the sale of a typical variable annuity are higher than commissions from almost any other product. Not only does the broker get a sales commission, but the broker-dealer also gets sales credits or “trailers” which in turn are partially passed on to the registered representative on a quarterly basis. These additional payments consist of a percentage of the asset base, usually .25% or higher. But since there is no front-load to variable annuities–100% of the principal goes into the contract–one might wonder where the insurer gets the money from which to pay these higher commissions. The answer is that the insurance carrier “fronts” the commission to the broker-dealer and recoups this money through the death benefit charge, known as the “mortality and expense risk” or “M&E.”
In order to ensure that the M&E will be in place long enough to compensate the insurer for the fronted commission expense, the insurer includes a contract feature called a Contingent Deferred Sales Charge or “CDSC.” (It is also known as an Early Surrender Charge). If, for carrier six or seven years to recover the commission and turn a profit. Thus, most variable annuities carry a longer surrender period. The owner must pay a penalty for premature withdrawals or surrendering the contract during this period. The penalty decreases each year until it disappears completely in the pre-specified year of ownership. Recently, variable annuities without surrender charges have begun to emerge, but most contracts still contain some form of penalty to impede immediate and unfettered liquidity
Read more: John Duval Associates.