Perhaps the most insidious feature of the variable annuity is its staggering annual costs. While the average mutual fund will charge just under 1. The feature that brokers and agents always refer to when defending a questionable recommendation of variable annuities is the death benefit.
Obviously, if your goal is solely to invest for retirement, this feature is worthless since it applies only if you die while owning the annuity. In that case, the death benefit theoretically would pay your beneficiary the amount of your deposits less withdrawals even if your account has lost money. But the death benefit is very expensive, costing over 1 percent per year, and statistics show that far fewer than one out of ten variable annuities is surrendered due to death. In other words, the insurance company almost never pays the death benefit, despite charging customers a huge annual fee for the feature.
Finally, we come to annuitization, the right to transform your annuity from a variable product into a stream of fixed, regular guaranteed payments.
To do this, you must turn the entire value of your annuity over to the insurance company, thereby permanently losing access to your funds.
And if you begin annuitization and die prematurely, some or all of your account balance may be forfeited to the insurance company. The truth is that any sum of money can be converted to a guaranteed income stream at any time through the purchase of an immediate fixed annuity, so the ability to annuitize is no reason to buy a variable annuity.
There are three principal ways to lose money in a variable annuity. First, and least common, is a failure of the insurance company that issued the variable annuity. Second, your money is invested in a number of sub-accounts, which work like mutual funds and are tied to the equity or fixed income markets.
You should ask your financial professional to explain to you all fees and expenses that may apply. You can also find a description of the fees and expenses in the prospectus for any variable annuity that you are considering. In some cases you may wish to exchange an existing variable annuity contract for a new annuity contract that has features that you prefer.
If you exchange contracts, you may be required to pay surrender charges on the old annuity if you are still in the surrender charge period. In addition, a new surrender charge period may begin when you exchange into the new annuity.
Before purchasing a variable annuity with a bonus credit, ask yourself and your financial professional whether the bonus is worth more to you than any increased fees and expenses you will pay for the bonus.
This may depend on a variety of factors such as the amount of the bonus credit and the increased fees and expenses, how long you hold your annuity contract, and the return on the underlying investments.
You also need to consider the other features of the annuity to determine whether it is a good investment for you. Annuity B has no bonus credit and deducts annual fees and expenses totaling 1.
You should also note that a bonus may only apply to your initial purchase payment, or to purchase payments you make within the first year of the annuity contract. Investor Bulletin: Performance Claims. Office of Investor Education and Advocacy U. Securities and Exchange Commission Email: help sec.
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Please enter some keywords to search. Variable Annuities. Tax Rules The federal tax rules that apply to variable annuities can be complicated. In addition, there may be state tax implications. Before investing, you may want to consult a tax adviser about the tax consequences of investing in a variable annuity. Retirement plans, like IRAs and employer-sponsored k plans, may also provide you with tax-deferred growth and other tax advantages.
For many investors, it will be best to max out their contributions to IRAs and k plans before investing in a variable annuity. If you are investing in a variable annuity through a tax-advantaged retirement plan, you will get no additional tax advantage from the variable annuity. There may be federal tax penalties if you withdraw your money before a certain age. Remember: Variable annuities could help you meet retirement and other long-range goals.
Variable annuities are not suitable for meeting short-term goals. Substantial taxes and surrender charges may apply if you withdraw your money early. However, variable annuities are not a perfect hedge against inflation by any means. Even though the long-run relationship between stock portfolio performance and general price levels has been significant, there have been short-run inconsistencies.
Variable annuities offer plans for lifetime annuity income and should only be undertaken on a long-term basis. Since variable annuities are primarily based on equity investments, monetary benefits can change monthly. Some companies include a loan provision; depending on tax qualifications. Some group contracts do not permit a loan provision.
The variable annuity can also be written with waiver of premium or term insurance riders, which would only apply to the accumulation period of a deferred variable annuity. Agents who want to sell variable annuities must be properly licensed by the state after examination in both the life and variable annuity areas, and be appointed as a life including variable annuity insurance agent by the insurance company underwriting the risk. The agent should be able to advise you and answer all your questions.
If you are thinking about buying a variable annuity, the agent should also have a license to sell variable annuity products. Since variable annuities are considered securities, you should receive a prospectus describing the investment alternatives available to you.
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