A variable annuity is a contract between an investor and an insurance company. The company promises to make periodic payments to the contract owner or beneficiary, starting immediately or at some future time, and should the contract owner die during the accumulation phase, a death benefit is paid directly to the beneficiary. Variable annuities offer choices among a number of complex contract features. For example, contracts may offer various types of death benefits, rebalancing features, dollar cost averaging options, assorted payout structures, and optional riders such as a guaranteed minimum income benefit, estate protection enhancements, or long-term care insurance, in addition to a range of choices among investment options.

Investment advisors and brokers do not always fully explain the intricacies of the variable annuity to prospective investors, or they recommend variable annuities when the recommendation is not in the investor's best interest. An investor may purchase a variable annuity without understanding that their money may be tied up for a significant period of time.

Section 1035 of the U.S. Tax Code allows an investor to exchange an existing variable annuity contract for a new annuity contract without paying any tax on the income and investment gains in the current variable annuity account. However, investors may be required to pay surrender charges on the old annuity if they are still in the surrender charge period. In addition, a new surrender charge period generally begins when an investor exchanges into the new annuity. This means that, for a significant number of years (as many as 10 years), an investor typically will have to pay a surrender charge (which can be as high as 9% of the purchase payments) if an investor withdraws funds from the new annuity. Further, the new annuity may have higher annual fees and charges than the old annuity, which will reduce returns.

Investment advisors or brokers who sell variable annuities with an eye to their own gain rather than their investor's best interests may be held liable, and customers may be able to recover damages. Singer Deutsch LLP has experience dealing with variable annuities fraud and can investigate suspicious sales or exchanges. Contact the firm for more information.