Welcome to one of the most misunderstood financial products out there. It’s no surprise how little most investors know about variable annuities because they’re extremely complicated and their explanations often come from insurance brokers and financial advisors who often don’t adequately explain their potential benefits and drawbacks. Over the past year variable annuity (VA) sales have skyrocketed as investors seek guarantees which may help them keep retirement plans on track.* So, who exactly is this product right for?
The average variable annuity owner in my practice is in their 50’s or 60’s and uses the annuity as a supplemental tool to provide retirement income. For example, if a couple has a $40K pension and $30K in social security income, we may dedicate a lump sum to an annuity which can provide the additional $30K to give them a total of $100K per year in guaranteed income.
We use the variable annuity in some cases instead of a fixed annuity because of the potential associated with allowing the annuity sub-accounts to fluctuate in stock and bond investments. This way, if the account grows in value, the client’s income base may have the ability to ‘step-up’ to a higher level. And if the contract doesn’t grow, there is still a guaranteed minimum base payout which they can rely upon.
It should be crystal clear that any investor considering the purchase of a variable annuity contract should have a full understanding that annuity options, including death benefits and living benefits, come at additional expenses and are the features are often subject to restrictions and limitations. The only way to fully understand a specific annuity product is to read the prospectus. That may take you a year, but then you’d have better information about how the product truly works.*
An annuity is generally not right for somebody without much savings who may have a need for liquidity. As annuities are designed to be long-term savings and distribution vehicles, they often have surrender periods in which the contract holder would pay a penalty if they were to cash out their contract in full. These periods are often 5 or 7 years.
Annuities also aren’t so popular with do-it-yourself investors. These people might argue that you can create a similar outcome with a basic life insurance policy and an income-oriented brokerage account. Doing it this way could also be less expensive over a long period of time.
The truth, in my opinion, is that annuity products are right for some and not right for others. Those who bought variable annuities with certain living benefits prior to the recession may be feeling good about their purchase at this point (assuming the insurance company is still in business). However, critics will constantly point to the fee exposure over the long-term and rarely find a use for this product in their financial lives.
Questions or comments? E-mail me.
Premier Financial Advisors, Inc
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
Guarantees are based on claims-paying ability of the issuer. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns are principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. Optional features may involve additional fees, expenses, limitations and other restrictions.
Variable annuities are long-term investment vehicles designed for retirement purposes. They are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, is available from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The guaranteed death benefit is based upon the claims paying ability of the issuing insurance company and does not apply to the contract value, which fluctuates daily. There may be an additional cost for the death benefit features of some variable annuities, and depending on the performance of the investment option(s) selected; the contract value at the time of annuitization could be such that the investor would incur a higher expense with the death benefit feature without receiving any explicit benefit.
Withdrawals and other distributions of taxable amounts, including death benefit options, will be subject to ordinary income tax, and if taken prior to age 59 ½ a 10% federal tax penalty may apply.
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.