A common problem often detected by FINRA and state securities authorities is the switching of variable annuity contracts by reps for clients who have no idea that they could very well be subject to additional expenses and charges.
For example, most variable annuity contracts impose a "surrender charge" if a holder redeems the annuity for its cash value within the first five or seven years. A typical surrender charge may be 7 percent the first year, 6 percent the second, declining to zero after seven years.
When Widow Barbara is enticed to switch ABC Annuity which she has owned for the last 10 years for XYZ Annuity, she subjects herself anew to another 7 years of surrender charges.
Furthermore, XYZ Annuity may carry higher expenses than ABC. Its mortality expenses, to pay for death benefits, may be much higher. The advisory fee on its investment portfolio may also be higher.
Comparing ABC to XYZ, there may be no justifiable reason for switching when one looks at the higher expenses.
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