Curious about Variable Annuities?
This will be brief, for two main reasons.
One, variable annuities run counter to our central premise that retirees should secure a floor guarantee they can depend on for retirement. Variable annuities do not provide this guarantee. Sure, you can pay even more in fees to buy an income guarantee, but why bother when better cheaper alternatives exist? (See Index Annuities)
Secondly, variable annuities are considered securities products by the SEC and are available from Securities firms. Annuity Straight Talk does not sell securities or variable annuities.
So with that out of the way, we’ll offer a quick summary of variable annuities.
First and foremost, a Variable Annuity offers you the potential for gains thru market performance, but shifts the risk of investment loss to you, the investor.
A VA is similar to, but more expensive than, holding your assets in stocks or mutual funds. Most of the benefits of annuities such as guarantees and income are available at extra costs through riders or other add-ons to your contract.
A Variable Annuity is a tax deferred insurance wrapper around mutual funds or bonds. The funds you can chose from to invest in may be limited in options by the insurance company.
Your returns will vary with the market, and your account value will be determined by the value of the investments selected in your portfolio. You could experience higher gains over traditional fixed annuities, CDs and savings plans, but the main variable annuity drawback is that you could also suffer losses.
As most people considering annuities in the first place are motivated to preserve capital and gain security, variable annuities don’t really fit the bill.
Variable Annuity Income Rider Options
To be fair, we do also consider variable annuities with an income rider to be a form of a hybrid annuity. By hybrid, we mean it combines both the appreciation and the lifetime income components of a traditional annuity.
However the main drawback to variable annuities with income riders are the exorbitant fees that nearly all of them levy on you each and every year.
Read up on the Hybrid Annuity to understand the difference between an Account Value, and an Income Account or Benefits Base. A variable annuity with a lifetime income rider operates exactly the same way, but at a higher cost.
Variable Annuity Fees
A typical variable annuity with income rider fee structure may look like this:
- Annuity Fees (for Mortality and Expense Charges)
- Early Surrender Charges
- Mutual Fund Management Fees
- Income and Death Benefit Rider charges
All together, these fees typically range from 3% on the low end to 6%, per year, regardless of your account performance!
In volatile markets where watered down mutual funds may lag the market, you could very easily capture losses on top of annual fees, and be subject to onerous surrender charges if you try to get out.
It’s no wonder that traditional money managers try to steer clients away from variable annuities…. but it’s borderline criminal to paint ALL annuities with the same brush.
Understand Variable Annuities In More Detail:
First and foremost, a Variable Annuity shifts the risk of investment loss, as well as the potential for gain thru market performance, to you, the investor. It’s very similar to, but more expensive than, holding your assets in stocks or mutual funds. Most of the benefits of annuities such as guarantees and income are available, however, through riders or other add-ons to your variable annuity contract.
So what is a Variable Annuity? A Variable Annuity life insurance company product is a tax deferred insurance product just like a Fixed Annuity, but in a variable annuity product you give up guaranteed appreciation in exchange for the potential for higher returns. Your returns will vary with the market, and your account value will be determined by the value of the investments selected in your portfolio. You could experience higher gains over traditional fixed annuities, CDs and savings plans, but the main variable annuity drawback is that you could also suffer losses.
As most people considering annuities in the first place are motivated to preserve capital and seek security with a modest rate of return, it’s imperative to get our Report in the signup box to the right, and learn more about the Pros and Cons of Variable Annuities.
Is a Variable Annuity For You?
- If you are seeking immediate monthly guaranteed payments in exchange for a lump sum of cash today, you are looking for an Immediate Annuity
- If you are looking to save over time, with a reasonable guaranteed rate of return and the maximum security, you are looking for a Fixed Annuity or a Fixed Index Annuity
- If you’re willing to waive the guaranteed appreciation and safety of the other products for the potential for higher appreciation, read on.
During the accumulation phase of a Variable Annuity contract, your appreciation rate is determined by the performance of investments you select in your sub-accounts. Within Variable Annuities, you can enter and exit the market. You are exposed to loss of principal while invested.
You are also generally limited in your investment selections within your sub accounts. As a result, there are more varieties of variable annuities than of Baskin Robbins ice cream. The range of choices in the variable annuity universe is huge, and extra caution is needed to pick the best one for you. Many of these variables, options, and critical add-ons are contained in Optional Riders .
The value of a variable annuity changes with performance of the investment options chosen. These investment options are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three. The variable annuity differs from other investments in several important ways:
- You can pick the mutual funds the insurance company invests your money into, all in separate accounts and subaccounts.
- You specify the allocation of your annuity in each portion, and you control where your contract will be invested.
- You, therefore, are responsible for your own gains and losses. Studies often show individuals consider themselves better than average drivers, and better than average investors. We can’t all be better than average….
Variable Annuity Summary:
Within individual company parameters, you can be as aggressive or as conservative as you would like. This gives a variable annuity the potential for higher returns, but it also requires you to assume a great risk of loss.
Presuming you are better than average and you’ve selected sub-accounts that have performed well, you may be ready to convert your account value into an income stream. Options you selected at the beginning of your annuity contract have a significant effect at this time.
To properly select, manage, then annuitize a variable annuity requires skills. While we don’t sell variable annuities, this website would not be complete without some information on how variable annuities work and their pros and cons. And as variable annuities make up the majority of annual annuity sales, many people have them.
We use safer, more guaranteed methods of creating stable retirement income. It you have a question about an existing variable annuity or want to consider other alternatives such as Secondary Market Annuities or Hybrid Annuities, please Contact Us.