Beware of the annuity salesman's scare tactics

All of this makes variable annuities inappropriate for short-term investors, people who won't live long enough for the benefits to outweigh the costs and those who need immediate income. Because annuities can offer juicy commissions, though, some salespeople push them regardless of whether they're good for their clients, as illustrated by these enforcement actions:

• A Banc of America Investment Services employee was charged with selling an unsuitable annuity to an 18-year-old. The teenager had received a small inheritance and planned to use the money after college as a home down payment. She was in too low a tax bracket to benefit from any tax deferral and had no need for the death benefit, as she was single and had no dependents. To make matters worse, the NASD says, the broker put all the client's money in a single equity investment subaccount, exposing her to much higher risk than was suitable.

• An Edward Jones employee was charged with an unsuitable sales transaction for selling a deferred variable annuity to a client who needed current income and who didn't need tax deferral or the death benefit. The NASD says the client was persuaded to liquidate $60,000 of a $250,000 portfolio to buy the annuity, only to find that her investments no longer generated enough income for her to live on. She wound up having to make $360-a-month withdrawals from the annuity just to make ends meet.

• A Raymond James and Associates representative allegedly persuaded a client to exchange an annuity she'd owned for six years for another. He reaped a higher commission, but the annuity cost her a $1,600 surrender penalty -- and left her with an investment with much higher expenses. Had she kept her original annuity for just eight more months, she could have accessed her money with no penalty. The new annuity had a surrender-penalty period of nine years.

If you think you or someone you love has been sold an unsuitable annuity, you can contact the SEC or the FINRA for help. These regulators also offer advice for those considering an annuity, such as the online booklet "Variable Annuities: Beyond the Hard Sell." If you're still interested in a variable annuity for retirement savings, here's how to make sure it's the right option:

• Don't buy an annuity that will be held in an IRA or 401k. An annuity's main benefit is tax deferral, and you've already got that in an IRA or 401k. If you're attracted by the death benefit, buy life insurance instead to ensure that your family will have enough money if you die.

• Don't buy an annuity until you've exhausted other retirement savings vehicles. You shouldn't consider a variable annuity until you've contributed the maximum to your 401k and have fully funded your traditional or Roth IRA for the year.

• Make sure this isn't money that will be inherited. Annuities, unlike most other investments, don't get a special tax treatment known as a "step-up in basis" when you die. That can eliminate taxes on stocks, bonds, mutual funds and real estate that are inherited. Your heirs will owe income taxes if they inherit an annuity.

Video: How to get your insurance claims paid

If you're worried about lawsuits, consider alternatives. There are usually other, cheaper ways to protect your assets, such as buying an umbrella liability-insurance policy.

• Be confident you're in it for the long haul. Analysts at T. Rowe Price figure you need to own a low-cost annuity for at least 10 years for the higher expenses to be outweighed by the tax benefits. The higher the annuity's cost, the longer you'll need to own it. Which leads to . . .

• Shop around. Vanguard, TIAA-CREF, T. Rowe Price and Fidelity are among the companies that offer lower-cost annuities.

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated Sept. 23, 2009

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