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Is Your Annuity A Good Fit For Your Financial Future? Learn How To Separate The Good From The Bad To Protect Your Retirement Savings.Annuities come in two flavors - good and bad. On one hand, there are traditional single premium immediate annuities (SPIA) that are simple and easy to understand. You exchange a fixed amount of money for a lifetime income stream thus transferring investment and life expectancy risk to the insurance company where it can be better managed. With a fixed annuity the earnings and payout are guaranteed by the insurance company. This is the traditional, conservative approach to annuitizing retirement income. Variable annuities are different. A variable annuity is basically a mutual fund investment wrapped in the veneer of an insurance contract. You make payments during the accumulation phase which are deposited into investment subaccounts which fluctuate just like comparable mutual funds. When you begin the payout phase you get your principal plus any gains or losses as a lump sum payment or you can annuitize that same amount into a monthly payment stream. If that over-simplified explanation didn't confuse you, then understand that variable annuities come loaded with a complex assortment of provisions and cost structures that confound even the experts. Salespeople like to present variable annuities as having the growth potential of a mutual fund with the security of insurance allowing you to invest in the stock market with a safety net because, hey, that's what sells well. They also might use scare tactics to sell you by claiming variable annuities can protect you from seizure of assets in a lawsuit because it's insurance.
"The truly educated man is that rare individual who can separate reality from illusion." - UnknownHowever, consumer advocates argue some variable annuity fees are so steep it can take more than a decade to outperform more straightforward investments, the benefits are misrepresented, and the restrictive features and penalties aren't adequately understood. Independent research has documented that variable annuity purchases are rarely based on educated decisions but instead on salesman's hype. The following educational resources provide a primer on annuities so that you know how to ask the right questions and arm yourself with enough information to make an informed decision. Your objective is to determine how a fixed annuity compares to a variable annuity and whether or not either product is the right choice for your investment needs.
"What is the difference between unethical and ethical advertising? Unethical advertising uses falsehoods to deceive the public; ethical advertising uses truth to deceive the public." - Vilhjalmur Stefansson
Variable Annuities ExplainedAs its name implies, the variable annuity's rate of return is not stable because it will vary with the performance of the underlying investment (subaccount). There are many different investment options for the subaccount similar to mutual funds with comparable risk/return profiles. The value of your investment will depend on the performance of the subaccount investment option you choose. What separates the variable annuity from a conventional mutual fund is the insurance wrapper and the high costs associated with it. Below are some of the more common features included in the insurance wrapper:
- Tax deferred earnings.
- Account is not subject to annual contribution limits like other tax deferred investments such as IRA's or 401K's.
- Guarantee against loss of capital (but usually only if you die).
- Death benefit.
- Annuity payout options offering periodic payments upon retirement.
- Withdrawals before age 59 ½ are subject to a 10% penalty except under certain narrow circumstances and are taxed as ordinary income.
- Withdrawals after age 59 ½ are taxed as ordinary income.
- Surrender charges if you withdraw money before a specified period.
- Mortality and expense risk charges to pay for the insurance risk (death benefit and guarantee against loss of principle).
- Administrative fees for recordkeeping and other expenses.
- Fund expenses for the investment subaccount.
- Various additional charges for any other features that might be added such as stepped up death benefits or minimum income guarantees.
"Any prospective customer who takes the time to understand variable annuities runs away screaming" - Forbes