Understanding the Negatives of Variable Annuities

One of the biggest challenges with variable annuities^# is that they are frequently sold by overzealous, self-serving insurance salesman or registered representatives believing that everyone needs most of their money in a variable deferred annuity. It is amazing how a nice big commission check helps them know this for a certainty. Do not be taken in by pushy sales tactics that are based on urgency, fear and dubious claims.
  

A true planning professional will explore all options, be patient, educate and properly allocate after running retirement cash flow projections. A true professional may meet with you several times over the course of a month or two. They may charge an hourly fee or just accept the commission paid by the insurance institution as their administrative fee. Why do you need to work with an agent anyway? Well, by law, a variable annuity^# has to be sold through an insurance licensed planner or insurance agent that is also securities-licensed. So when you are ready to implement, a professional licensed financial planner/educator can really help you objectively sort through the thousands of annuities and options available.

As far as the high commissions that annuities purportedly pay, frankly, all financial products pay high commissions. Ever notice the nice buildings that banks and investment firms reside in? And they are normally the ones crying wolf about high annuity commissions. Never focus on what someone else is compensated; rather, focus on meeting your specific objectives.

As with all investments, there are characteristics to be aware of and take into consideration. These characteristics for one may be a true disadvantage and for others they may have no negative impact based on their specific situation and planning objectives.

Variable Deferred Annuity Pitfalls

Some of the recent criticisms of variable annuities^# are the high fees that tend to cut the overall return and growth of their retirement investments. From 1999 through 2009, variable annuities^# have generally not fared well based on a down stock market and not so well against market index funds, since variable annuity^# fees are typically at least a couple of percent higher. An approximation of fees that are customary on variable annuities^# are as follows: Administrative .25% Mortality .75% Income rider .75% Enhanced Death Benefit .75% Underlying Investment Expense 1.5%. As you can see, minimum fees on a stripped out variable are around 2% and a fully featured variable annuity^# may run as high as 5%. The problem with fees is obvious. If your investments are down 20% and you add fees, you are down about 25%. So fees would actually comprise around 20% of your loss, which does a real number on your principal. In down markets the equation does not work so well for variable annuities^#.

Deferred Variable Annuity vs. Deferred Fixed Annuity

So, what is the distinction between variable deferred and fixed deferred ? It is very simple: Fixed is when the insurance institution assumes the risk for your principal and accumulation and variable is when you assume the risk for the underlying investments, principal and accumulation. Fixed annuities normally have minimal or no fees and their very nature allows to principal or accumulation.

Deferred Variable Annuity Pitfalls

• Unsuitable investment advice and planning
• Term commitment over several years
• High surrender fees
• Some variable annuities^# do not allow additional contributions
• Deferral in variable annuities^# allows the value of the annuity to increase or decrease
• Exposure to loss of principal
• After a deferral period, a variable annuity^# may or may not produce more income
• Variable deferred annuities can be annuitized providing a lifetime of income; however, income will fluctuate based on underlying investments
• Variable deferred annuities are typically invested in the securities market and the client assumes the market risk
• Deferred variable annuities^# are first **guaranteed by the claims paying ability of the insurer. The underlying invested assets are owned by the client and are not at risk of forfeiture if the insurer defaults
• Variable annuities are not backed by the SIGA (State Insurance Guarantee Association)
• High fees, 2-5% of the annual account balance is typical

Pitfalls of Deferred Variable Annuity Summary

All deferred variable annuities^# enjoy tax deferral with no income tax requirement until withdrawal. This may be an advantage over many investments like CDs, mutual fund^{^}s and securities-oriented investments when considering a long term retirement plan.

A long term variable annuity^# investment may be able to out perform CDs, bonds and treasuries. Reinvesting money that would otherwise be paid out in tax over an extended period of years is always an advantage.In addition, deferred variable annuities^# have several benefits that may be beneficial for retirement planning.

Question: What is the customary death benefit on a variable annuity^#?

Answer: Whatever principal you originally put into the variable annuity^#, if it drops below that point, your principal will be restored at your death.