Variable Annuities May Not Be In Your Best Interest

Bill Broich
 


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Variable annuities are investment contracts that allow the owner to invest in a multitude of investment options. In the event of a need to change an investment option within the annuity, this can be done without exposure to tax liability.

Variable annuities can offer a large number of options that can be customized to meet the goals of the owner. Listed below are several considerations to consider prior to purchasing a variable annuity.

Guarantee of principal: variable annuities are just that, variable. The value of a variable annuity can change daily based on the performance of the asset within the annuity. In the event of the need to cancel a variable annuity the funds in the annuity can be less than the amount invested. Variable annuities do not protect your principal.

Charges, Fees and Expenses: Think of a variable annuity as two sets of fees. One fee for the contract and a second fee for the management of the funds within the contract. Other fees can also be charged if you have added additional riders to the contract. These riders can provide additional benefits but if you are not intending to use those benefits the cost can be high. Fees on variable annuities are charged against the accumulated value of the contract. As an example, if your account increases in value then your fees will also increase. The prospectus given when a variable annuity is considered will list the fees and expenses. A very good rule of thumb is this:

Contractual or insurance company fee…1.4% to 1.6% of account value Fund management fee…. . .4% to 1.3% of funds in each sub account Annual contract fee…many contracts will charge an annual fee of $30 Income fee, guarantee fee, inflation fee…. these are all individual charges that will be listed in the prospectus.

Make certain you fully understand all the fees and expenses, make your salesperson fully explain them to you.

Loads commissions and compensation: How much can a salesperson make when a variable annuity is sold? The answer is it all depends. It depends on the company, the products and the underlying fees charged on the account.

AS an example: Most salespeople will earn 5-7% of the initial premium deposit. Each quarter the variable annuity is in force will provide additional income to the salesperson. This compensation will vary greatly but ¼% to ½% of account value on an annual basis would be a good guess. The broker would receive compensation each quarter in most situations. These are also known as trail commissions.

No State Guarantee of Principal: Many people believe this is a negative because of the exemption from the underlying state guarantee protection of the state of residence. In fact it is a point of no concern because the variable annuity funds are not at the insurance company, they are invested in the sub accounts and are fully accountable

Stock Market Risk and Volatility of Account Value: In fact your invested funds are subject to change in value that can affect the overall value of your variable annuity. A variable annuity can increase and decrease in value based on investment performance.

Variable Annuities are Taxable at Death. Any gain in the policy is fully taxable as ordinary income at death to the beneficiary of the annuity. This is true of any type of annuity not just a variable annuity.

Here is a list of questions to consider before buying a variable annuity.

  • Variable annuities are long term investments, does that met your personal investment goals?

  • Are you investing in the variable annuity in your IRA? Not a good idea, variable annuities are tax deferred products and an IRA is a tax deferred account. Placing a variable annuity in your IRA would expose you to contractual fees that may not need to be paid.

  • Are you willing to accept the risk that your account value may decrease if the underlying investment performs poorly?

  • Do you understand the surrender fees if you terminate your variable annuity early?

  • If a variable annuity offers a bonus credit, how does it compare to the additional fees that can be charged in the contract?

  • Have you consulted your tax advisor regarding the tax consequences of purchasing an annuity?

  • Do you understand the features of the variable annuity?

  • Do you understand all of the fees and expenses that the variable annuity charges?

    Before purchasing or changing a variable annuity make certain you understand all aspects of the product. Make certain your salesperson explains all aspects of the contract not just the benefits.

    Then call the company and get the information confirmed by them. Disclosure is the key with these products. If they are not in tune with your goals or time frame, they can be a terrible decision.

    Bill Broich is a 30 year annuity salesman who helps people manage their retirement savings. Discover more at his website - Annuity.com

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