Variable Annuities Pros and Cons
No other product in the Annuity business creates as much controversy as Variable Annuities. Frankly, I’m getting kind of tired of all the loud opinions about variable annuities- it’s either a table thumping BUY or a screaming SELL. The noise about variable annuities pros and cons is overwhelming.
It’s just like watching Jim Cramer on Mad Money. There’s no middle ground, and if you follow the BUY side (selling agents) every sales office should have a line of people waiting to buy. Listen to the SELL crowd (journalists and many financial planners) every insurance company would be shut down because of fraud.
I know that sounds extreme but it really does show you the difference in the type of advice you are bound to get. So if you are familiar with my work, you’ll know that I try to be objective and provide solid evidence as to the pros and cons of annuities of All shapes and sizes.
Frankly, I’ve avoided writing this for a long time, because these are complicated beasts and it’s hard to make any kind of apples to apples comparisons. But I’ll tackle the variable annuity debate in this article. Before I go further, let me say that even after my research and experience in the industry, I am not overwhelmingly for or against variable annuities.
Like a lot of things in life, there are times when they work great and others when they are completely inappropriate.
Variable Annuities Pros and Cons: First, The Pros…
* Death Benefit- This allows the heirs of the contract to inherit the full principal balance in the event that the contract owner passes away while the contract is in force and the account has lost value
* Income- This allows the contract owner to lock in a predetermined level of future income regardless of account performance.
* Principal- This allows the contract owner to recover the principal investment or the highest contract value achieved regardless of the account value at time of surrender.
Tax Deferral: Taxes are deferred on the growth of assets inside an annuity giving the contract owner the added benefit of greater compounding. Many critics suggest that excessive fees mitigate tax deferral benefits. If tax deferral is the sole focus of purchasing an annuity, expensive optional riders can be waived so that total fees will run no higher than the average mutual fund.
Unlimited Contributions: Retirement plans have contribution limits. If you ever come in to a larger sum of money, much of it will not be eligible for allocation in a 401K, IRA, etc. Annuities have no contribution limits.
Variable Annuities Pros and Cons- Now for the Cons…
High Fees: Many annuities have optional riders that push the overall fees to 3% or more. Plenty of products allow an investor to elect out of the options but some don’t. If you are purchasing an annuity with high fees, there had better be compelling reasons to do so.
* Limited Investment Choices: Asset allocation options are limited within an annuity. Some contracts have predetermined portfolio balances and others will list a limited number of available mutual funds.
* Surrender Charges: As with all annuities, variable products have surrender charges so your money is tied up for a specified period of time except for the usual 10% annual free withdrawal. Be positive that the surrender schedule works with your investment time horizon.
* Immobility: The combination of investment limitations and surrender charges means that your money is much less mobile than it would be in an equivalent securities account.
As you can see, the analysis is pretty simple. If you are weighing the variable annuities pros and cons, you need to see first what you need for your retirement, and only then look at a specific product.
For most of my customers weighing Safety, Flexibility, and Profitability as the decision tool when analyzing whether or not to Buy Annuities, most of the cons seem to be deal breakers if even if a few components are tolerable. Overall, for me, the cons outweigh the pros most of the time. Variable annuities have specific uses for a small class of investors that either works for you or it doesn’t. Make sure to seek solid advice from an open-minded advisor who can objectively look at the variable annuities pros and cons ONLY AFTER understanding your needs fully.