When Variable Annuities Work

Over the past few weeks, several people have called with concern regarding changes to a few of the longtime favorite vehicles for passing along assets to the next generation. While I’ll talk more specifically about annuities in those terms next week, I thought following up the variable annuity article from a couple weeks ago would be the best way to start.

As mentioned before, variable annuities constitute the majority of annuity sales nationwide, by a wide margin. But they also account for the majority of the negative information about annuities in general. High fees and complicated contracts are most present with VAs whereas many other annuities are fairly simple and can be owned free of charge.

With all the negative information it’s surprising that so many people overcome the objections to buy one. There are plenty of good things about variable annuities and I tried to make clear that the fees are reasonable when you calculate the cost of a guarantee along with market risk. Variable annuities offer tax deferral for non-qualified assets so if you don’t have an IRA but want market investments free from annual taxation then there is almost no other choice. Variable annuities offer income guarantees in addition to full market participation so a retiree doesn’t have to sacrifice a paycheck if the markets drop just before retirement. No other investment offers that kind of protection.

Because of the two reasons above, there are lots of people who are satisfied with the choice to use a variable annuity. But there is another situation where these products are the only option. There is literally no other asset that will do it. Let me tell you a quick story to illustrate the benefit.

I met Ron a few weeks ago. He was looking for a place to put some money that could be left to his heirs, with the assumption that he would live at least another 20 years. Ron didn’t want to risk the principal but also wanted the most growth he could get. Another advisor showed him an index annuity with a ridiculously high rate of return so he contacted me to see if the offer was legitimate.

I thought the offer was total BS and during the evaluation I learned that Ron had been misled in a variety of ways. My first offer was to give him some basic education about index annuities. It is important first to understand a financial product completely, then decide if it’s something you want to use and only then consider potential contracts and options. Too many people are introduced to this market only because of a sales pitch.

During our second meeting I explained index annuities to Ron and told him about the value of these products based on reasonable assumptions. If you want maximum returns then you have to accept risk. If you want ultimate safety then put the money in your pocket. The solution lies somewhere in the middle for many people who love the idea of protecting assets and are willing to sacrifice some of the performance in exchange.

Ron holds the opinion that inflation is going to wreak havoc on the economy and that the stock market is going to go wild. He wants the highest level of growth he can get but doesn’t want to sacrifice his initial investment. Index annuities don’t give him the type of upside he wants and he only started looking at them because of the protection aspect. I always find it interesting that while I help educate someone on financial options that same person often gets testy with me as did happen in this case.

Ron wants full market participation without risk of losing his investment. It sounds like a fairy tale, doesn’t it? If you want market returns then you have to accept the risk of losing money. If you want to protect money then you will give up some yield. It’s common sense.

After a fair bit of back and forth I had to remind Ron that he was the one who called me. He thinks the stock market is going to skyrocket because of inflation. He doesn’t want to risk his initial investment. Enter variable annuities. The basic fee that many complain about is the exact solution in this situation.

The only solution is a variable annuity.

Variable annuities have a base-level fee that guarantees the principal investment as a death benefit. So Ron can buy a variable annuity and fully participate in the stock market while knowing that no matter what happens, his heirs will never inherit less than his initial investment. It’s a pretty powerful feature in the right scenario. Again, ask any investment manager to guarantee the remainder of principal along with full market participation. The ONLY solution is a variable annuity.

Your heirs get all the upside of the market but if the market drops right when you kick the bucket, they will receive every penny of your investment in return. There are many instances where this is desirable and it’s one of two fundamental benefits of using variable annuities. Inheritance is a major priority for many and this is the only way to pursue maximum growth without risking basis. I don’t sell variable annuities but I told Ron to go buy one.

Curiously enough, Ron has an investment manager for some other assets who told him first to buy a variable annuity. He only contacted me because someone showed him an overblown index annuity illustration. After several hours of my time, I sent him back to where he came from. He had the solution all along but didn’t know it because he wanted more. As usually seems to be the case I was stuck in the middle just doing what I always do, telling the truth.

Check back next week for the second article on annuities as an inheritance tool. If you have anything to add or any questions then comment below or send me an email.


(800) 438-5121

Last Updated on April 2, 2024 by Bryan Anderson