VA customers don’t read prospectuses — and at 200 pages, who can blame them?

Insurance customers looking to do some light reading this summer should probably avoid looking at a prospectus for a variable annuity.
Out of the 15 top-selling VA products, the prospectuses for eight stretch beyond 150 pages, according to a study from the Insured Retirement Institute. Two of them are over 200 pages.
The group also asked 709 retirees and pre-retirees with at least $100,000 in investible assets what they do with these tomes. Not surprisingly, few of the polled consumers read the prospectuses that came with their variable annuities. More than one in four said they never leaf through the information, while 42% said they “rarely” open the document. About half of the consumers said they never refer back to their prospectuses after they buy their VAs.
The few customers who do actually read the documents do so in small bites: 98% read the summary and highlights section, while 97% tackle the fees and expenses.
Nearly 90% read up on risks, deductions from their accounts — such as sales loads and commissions — and investment choices. Contract benefits are rarely examined; only 58% of the polled consumers venture into that part of the prospectus. But seven out of 10 that do read the documents go over death benefits.
The IRI has led the charge in support of the slimmed-down prospectus, sending the Securities and Exchange Commission a “proof of concept” VA summary prospectus nearly two weeks ago. Susan Nash, associate director, disclosure and insurance product regulation at the SEC’s Division of Investment Management, spoke positively of the document.
She spoke on her own behalf, and not on the SEC’s, noting she has read the IRI’s summary prospectus but has not compared it with the corresponding statutory documents yet. “It avoids the temptation to talk about structural matters; it tells you what’s going on rather than focusing on the legal underpinnings,” Ms. Nash said at the IRI’s conference yesterday.
Still, there are a number of areas that need work. “An area we can’t analyze is the traps for the unwary: How can you lose benefits, and is the presentation [of that] balanced?” she asked.
Focusing on VA features rather than on the relationship between the contract and its riders helps eliminate some jargon, she said. But the tie between the VA chassis and its riders can be an integral part of the outcome for investors.
“If the ‘how’ is the nuts and bolts of what I get — 4% or 6% lifetime income — then that’s a big ‘how’ and I’d want to know when I get 4% and when I get 6%,” Ms. Nash said.