What a variable annuity is, in one paragraph
A variable annuity is an insurance contract that holds mutual-fund-like investments inside it. You pay in, the money grows tax-deferred in “subaccounts,” and at some point you can turn it into a stream of payments or simply withdraw. The insurance wrapper adds a death benefit and, for an extra charge, optional “riders” promising guaranteed income or withdrawal amounts. In exchange, the contract charges annual mortality and expense fees, administrative fees, subaccount expenses, and rider fees — commonly adding up to 2 to 3.5 percent a year — and imposes a surrender charge if you take your money out during the first several years.
It is a legitimate product for some people. It is sold to far more people than it suits, because the commission on a variable annuity is among the highest in retail brokerage, and it is paid up front.
The surrender charge is the trap
The surrender schedule is the feature that turns a bad recommendation into a loss you cannot escape. A typical schedule starts at 7 or 8 percent of the amount withdrawn in year one and declines a point a year to zero after seven to ten years; some contracts run longer. For a retiree who moves abroad and discovers a year later that the brokerage is closing the account, or that the “income” is a fraction of what was described, the choice is to stay in a product that does not fit or to pay thousands to leave it. Both outcomes are what the claim is about.
Two questions decide a great deal: were you told, in plain terms, how long the surrender period was and what it would cost to leave early? And was there any reason a person your age, with your need for liquidity, should have been locked up for that long?
Where the recommendation goes wrong
FINRA Rule 2111 requires a reasonable basis to believe a recommendation suits your age, financial situation, liquidity needs, and objectives; since June 30, 2020, Regulation Best Interest requires that it be in your best interest, with costs considered. FINRA also has a rule specific to deferred variable annuities requiring the firm’s principal to review each sale, and specifically to consider whether the customer would actually benefit from the features being charged for, and — for an exchange from one annuity to another — whether a new surrender period is justified. The recurring failures in cases involving retirees abroad are these:
- A surrender period that runs past the buyer’s reasonable life expectancy or past the date they would need the money
- An annuity purchased inside an IRA, buying tax deferral the IRA already provides, at the cost of fees and a lockup
- A rider sold as “guaranteed income” to someone who was never going to annuitize and did not understand that the guarantee applies to a benefit base, not to cash
- A 1035 exchange from one annuity into another that restarted the surrender clock and paid a new commission, with no real improvement
- A large share of liquid net worth placed in one contract, leaving no cushion
- An annuity recommended as the “solution” to a brokerage closing the account, without any comparison to simply transferring
The rider problem
Guaranteed lifetime withdrawal and income riders are the most misunderstood part of these contracts. The “guaranteed” figure is a benefit base — a bookkeeping number that grows on paper and determines how much you may withdraw each year — not an account value you can take as a lump sum. Retirees regularly discover that the “$500,000 guarantee” they were sold means the right to withdraw a fixed percentage a year for life, while the cash value they could actually surrender is far lower. A broker who let a customer believe otherwise, or who sold a rider whose annual cost outweighed any realistic benefit, has made a claim.
What can be recovered
The measure of damages in an annuity case is typically what you lost by being in the product: surrender charges paid or still owed, the excess fees over a suitable alternative, and the difference between how the contract performed and how a suitable portfolio would have performed over the same period. Panels can add interest and, where a statute or the account agreement allows, costs and attorneys’ fees. Every case is specific, and no outcome can be promised; the firm’s own suitability file — the paperwork its principal signed to approve the sale — is often the most important document.
The claim is against the brokerage firm and broker that recommended the contract, in FINRA arbitration. The insurance company that issued it is generally not a FINRA member, and the contract itself is not usually the target; the recommendation is.
A note on taxes and on living abroad
Surrendering an annuity, exchanging it, or annuitizing it each has tax consequences, and those consequences may look different for a US citizen resident abroad. One caution that applies to every paragraph here: we are securities litigators, not tax advisors. Anything involving your US return, the foreign earned income exclusion, or how a sale is taxed belongs with a CPA who handles expats.
Distance does not affect the claim. The contract, the application, the firm’s suitability review, the prospectus, and your statements are the evidence, and the review of them is done in our office, free and confidentially.
Key takeaways
If you remember six things
- Variable annuities charge 2 to 3.5 percent a year and lock money up for seven to ten years; the commission is paid up front.
- The surrender schedule is what turns a poor recommendation into a loss you cannot leave.
- FINRA Rule 2111 and Regulation Best Interest govern the recommendation; a separate FINRA rule requires principal review of every deferred variable annuity sale.
- An annuity inside an IRA buys tax deferral the IRA already provides.
- A rider’s “guarantee” is a benefit base, not cash — a common source of misunderstanding and claims.
- Damages typically include surrender charges, excess fees, and lost performance; no outcome is ever promised.
Questions
Asked most often
I signed the annuity application and the prospectus receipt. Does that end my claim?
No. Signing paperwork does not make an unsuitable recommendation suitable, and firms rely on those signatures in every case. What matters is whether the broker had a reasonable basis to recommend that product to a person in your situation, and whether the terms were actually explained.
Can I get the surrender charge back?
Surrender charges paid, or still owed, are a normal component of damages in an annuity case. Whether they are recovered depends on the facts, and no result can be promised.
The annuity was bought in my IRA. Is that itself a problem?
It is a recognized warning sign. An IRA is already tax-deferred, so the annuity’s main tax feature adds nothing while its fees and surrender schedule remain. Firms are expected to document why the insurance features justified the cost.
Should I surrender the annuity now?
Do not do anything to the contract before the review. Surrendering may crystallize a charge and a tax bill, and the claim is evaluated on what you were sold, not on what you do next. Send the contract and statements first.