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L-Share Annuities: Stale Wine in a New Bottle

Annuities are a constant subject of litigation, and for good reason. Although the companies that pitch annuities describe them as relatively simple products, they are anything but.  These are complex contracts with high fees, long lock-up periods and bewildering disclosure documents.

Basically, an annuity is a life insurance policy that is bundled with a separate investment account. Your investment account can be at a fixed guaranteed rate or a variable rate tied to the stock market or some other indice. You can pay a lump sum of money or pay over-time into the annuity, but your money is locked-up for an extended period of time.

It is important to understand that insurance companies design an annuity’s lock-up period to hold and use your money for their benefit over an extended period of time, typically 7 years, in exchange for a relatively low rate of return. If you attempt to withdraw money before the lock-up period expires, you will pay a hefty surrender charge to offset the sales commission the insurance company paid the salesman.  Thus, you should consider an annuity to be an illiquid investment.

The illiquid nature of annuities forms a major burden that deters many potential investors. Many investors prefer not to have their assets tied up for 7 years unless they are receiving a premium return, something annuities generally fail to deliver. To overcome the illiquidity objection, insurance companies have devised a product with a shorter 3-year lock-up period, the L-share. Insurance companies tout the L-share as the perfect solution for investors who are reluctant to commit to an annuity because of the long lock-up period and high surrender charges.  However, the L-share is simply the same stale wine corked in a new bottle.

Buried in the fine print is a discussion of operating and mortality expenses and administration fees.  In some cases, the L-shares annual fees and expenses can be as high as 3%.  A close examination reveals the L-share fees are significantly higher than the typical 7-year annuity. A calculation done by the online resource Annuity FYI illustrates a typical situation where there is a $100,000 investment with an assumed growth rate of 10% over 10 years.  Investing in an L-share annuity results in a 4.50% lower return after 10 years (in this case, $10,507 less) than if the same money were invested in a standard variable annuity. This difference comes primarily from the higher mortality expenses and administration fee (1.65% vs. 1.15%). Therefore, these higher fees can actually offset the potential benefits of the shorter surrender period.

So before you turn over your hard earned money, do your due diligence.  Have the salesman quantify for you in plain English: (1) all of the fees and expenses associated with the product, (2) how the surrender charges work, and (3) exactly how much commission they will earn from your investment. And last but not least, compare the expenses of a variable annuity with a do-it-yourself annuity – a term life insurance policy and an S&P 500 index mutual fund.

If you think you are a victim of financial fraud or have any questions regarding the regulations surrounding annuities or other investments, please contact Sanford Heisler Sharp, LLP to speak with one of our experienced financial fraud lawyers.

Charles Field

Charles Field

Charles H. Field is a partner in the San Diego office of Sanford Heisler Sharp. As Co-Chair of the Firm’s Financial Services practice, Mr. Field leverages his decades of practice focused on commercial transactions and regulation to recover investments that have been mishandled or lost. Learn More

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