A hidden danger of variable annuities

Variable annuities can have some details in the fine print that cause significant consequences down the road.
Flickr user lejoe

(MoneyWatch) I've previously outlined some of the reasons I don't recommend variable annuities. They tend to have high costs, limited liquidity and significant complexity. However, Kristin Poole, an advisor at my firm, recently came across another ugly situation where a widower may have $150,000 less to spend in retirement than he or his late wife expected due to a problem with a variable annuity they bought.

When the wife purchased a variable annuity in her name, she made the husband the co-annuitant. The salesman told the couple that the husband would get the value of the account if the wife passed away. The wife also designated her sister and her husband's sister as the primary beneficiaries.

How to evaluate index and passive funds
Like pain? Check your portfolio
Why investors can ignore the mini-flash crash

Sadly, the wife passed away recently, and during this already difficult time, her husband has found that the annuity would be split between his sister and his late wife's sister. When he returned to the salesman for clarity, the salesman maintained that he thought the husband would get the value of the account. But, in fact, the insurance company confirmed that because the annuity is annuitant-driven, the beneficiaries (the sisters) will receive the funds, not the co-annuitant (the husband).

The best the husband can do is ask the sisters to give him the money, file a lawsuit or reduce the amount he plans to spend in retirement. Not a good option in the batch, particularly having just lost his wife.

For the same reason that a car salesperson may not be an expert on how a transmission functions, an annuity salesperson may not be an expert on asset titling. It's important to recognize that the person selling a financial product may not have a full understanding of all its technical aspects. So here we have another reason to be cautious about buying variable annuities.

For those who already own a variable annuity, I always recommend having an independent advisor review the product to assure that it actually works the way you expect.

Image courtesy of Flickr user lejoe

  • Larry Swedroe On Twitter»

    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.