Variable annuities: Buyer beware

Many people are skittish about stock markets these days. They seek stock market returns without stock market risk. Insurance companies appear to offer this cake and ability to eat it too through Variable Annuity products.

What about those guarantees from insurance companies that come with Variable Annuities?

Variable annuities have a “real” account value and also a “virtual” or guarantee base account value. The trick is in the fine print as to which value is used, and how it is used, to calculate guaranteed income later.

Variable Annuities come with additional fees associated with the guarantee; fees over and above “normal” fees associated with the variable annuity such as Mortality and Expense charges, surrendeer charges, mutual fund expenses, etc. You don’t get something-for-nothing.

What you need to decide is whether you really need the guarantee? If you can not find a trusted adviser who trully understands how to measure and manage assets in retirement, maybe turning that function over to an insurance company may be what you need.

You can achieve retirement income through a properly structured portfolio of indexed mutual funds and receive income from both gains and dividends (Total Return approach). Of course, markets also go down, so properly structuring the portfolio to include”shock absorbers” such as short term indexed bond funds is important. With this method you retain control of your assets.

You could get guaranteed income through an Immediate Annuity and bypass market risks entirely. However, this means giving up control of your assets. Read more about my thoughts on Immediate Annuities.

Resources to broaden your understanding:

Lisa Gibbs at Money wrote an insightful piece that succinctly goes through the main issues of Variable Annuities. View the original article entitled Variable Annuities – No Pot of Gold.

Lisa Gibbs also discusses indexed annuities which are fixed annuities with a returns calculation linked to some market index. You can view here orignal article entitled Index annuities are a safety trap. Note: the section on Annuities 101 in the left sidebar is a useful, and brief resource too.

A general discussion about annuities can also be found in Wikipedia.

As you can see, annuities are complex and it is often hard to determine just what to expect since the devil’s in the fine print.

An alternative to annuities?

We all invest in the same markets, including the insurance companies. I believe the Structured Investing approach provides a rational participation in the markets and risk can be modulated through investor rational choices.

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One Response to Variable annuities: Buyer beware

  1. Larry Frank, Sr. June 3, 2012 at 4:49 pm #

    From Kiplingers: Equity Indexed Annuities (although I also take exception to Variable annuity recommendation due to the high fees and surrender periods).

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