Coleman Law Firm

If you have purchased a variable annuity, or any annuity for that matter, it is likely that you do not fully understand how it works, what it does and does not offer you, or why you even purchased it in the first place. It is also very likely that your insurance agent, banker, broker, or financial planner does not fully understand what he or she sold you either, yet he or she likely presented the annuity idea to you with the uttermost zeal.  What these financial salespeople clearly understand, is that annuity sales typically generate higher commissions than sales of other investment products. Be careful when being persuaded to purchase an annuity, and be extra careful when someone encourages you to transfer your annuity to a new annuity.

You should be particularly careful when considering transferring your money from one annuity to another.   This procedure is often referred to as a 1035 or tax free exchange and is different from simply transferring money from one investment choice to another within the same annuity. Here, you actually exchange an existing variable annuity contract for a new annuity contract. There are legitimate reasons for a 1035 exchange; however, there are several potential downsides that your annuity salesperson may or may not know or remember to mention, including:  1) surrender charges for surrendering the first annuity; 2) possible subjection to a new and potentially longer surrender charge schedule for the new annuity; 3) ineligibility for a tax free transfer; 4) or higher fees for the new annuity.

In addition to the foregoing, numerous annuity beneficiaries have suffered tremendous losses at the hands of annuity salespeople who knowingly or negligently failed to address the potential detrimental effects of 1035 exchanges on the value of the initial annuity contract’s death benefit.  Death benefits come in various forms, but most variable annuity contracts guarantee that the beneficiaries of the contract will receive, upon the annuitant’s death, the original amount invested in the annuity contract, adjusted for withdrawals.  This provides peace of mind in that the beneficiaries will receive at least what was invested in the contract, regardless of investment performance.  Some contracts offer beneficiaries a death benefit guaranteeing beneficiaries the higher of the original invested amount or the highest appreciated value of the annuity, determined at certain prescribed future dates. Regardless, fees are assessed for the death benefit feature, and the death benefit guarantee can be very important and powerful in the event of decreased investment values.

Assume, for example, you invested $500,000 with XYZ variable annuity company and, due to market declines and/or inappropriate investment choices, the variable annuity decreased to $250,000 in value.  Assuming no withdrawals, the death benefit would still be $500,000.   In this scenario, many competing financial salespeople likely would encourage you to consider a different annuity with different investment choices or additional bells and whistles, and a $250,000 or 50% portfolio decline may encourage you to do so.  Annuity transferor beware! If you were to transfer your XYZ annuity to a PDQ annuity, your new death benefit would be based on the new investment value of $250,000 and not $500,000.

Similar scenarios have played out where death occurred while investment values continued to decline or before the investment values could hope to close the 50% loss gap.  Many investors and beneficiaries have brought claims against annuity salespeople and their employing firms for intentionally failing to or not knowing to disclose the potential loss of death benefit value when conducting a 1035 exchange.

If you wish to discuss the circumstances of your annuity investment or have questions about securities fraud and want to know if you have a case, please contact us at (727) 461-7474 or visit our Investor FAQs page and fill out the Do I Have a Case form at 

For more information about Securities fraud, or estate planning, particularly if you are in Clearwater, Palm Harbor, Tarpon Springs or the Tampa Bay, Florida area, go to our website

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