Not all Annuities are Created Equal: The Variable Annuity

There’s a great deal of confusion surrounding annuities.

Many financial experts are quick to condemn all annuity products based solely on the downsides of one particular type of annuity: the variable annuity.

Many advisors push variable annuities as the perfect way to provide retirees with a steady income stream in their golden years. But among the things they won’t tell you about (unless you know what questions to ask) are the various fees you will be charged and the risk that could spell disaster for a retiree.

Many people don’t know that variable annuities are considered securities and are therefore regulated by the SEC.  They are generally made up of mutual fund subaccounts which are insured by an insurance company. The insurance companies offer annuity features along with the subaccount, but still charge management expenses and other fees.  All the while, you’re exposed to the same market risk associated with mutual funds.

Let’s talk about those fees in more detail

Mutual funds are riddled with fund management costs which are passed on to variable annuity products.  You can expect to pay anywhere from 1¼% to 2½% every year for the management cost alone.

You’ll also pay mortality and expense fees, which can be as high as 5% or more in many cases.  Mortality fees cover the death benefit your heirs will receive when you pass away.  An annuity usually will pay either the account balance or the premium you paid (whichever is higher), to ensure a death benefit to your heirs.

The expense fee is simply the insurance company’s profit.  This fee comes out of your account whether you make money or not.  In essence, you will be paying your insurance company to manage your account even if it catastrophically crashes.  Do you really want to pay someone who poorly manages your money?

So, if you add up all these fees they could amount to as much as 7½% annually.  When you factor in the current average inflation rate of 3½%, you will find that your variable annuity will need to have a rate of return around 11% just to break even.  With all the fees you pay, you could end up losing money even if your annuity has a good year.  And if you have a bad year, your annuity’s value will sink like a stone, and it will be less resilient in the event of a market recovery (again because of the fees).

As an investor, it’s important to know what you’re getting into before you give your money to an advisor who may not be looking out for you.

Some annuity products can be perfect for retirees; in fact, a proposed U.S. Senate bill may require all retirement plans to contain some type of annuity component.  But if you’re looking into annuities for your retirement, make sure you avoid the variable annuity.  Otherwise, high risk and high fees could leave you hanging out to dry when you retire.

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The information contained in this page is strictly for educational purposes and is not intended to provide specific financial advice. First Senior Financial Group does not recommend or sell securities to anyone at any time.

Important: Get Educated

Although Bill & Patricia are not yet clients of First Senior Financial Group, they did come through the three-step educational process. They were invested entirely in variable annuities, very risky vehicles which are loaded with fees. Through their education they learned the pitfalls inherent with these investments and gained valuable information that will help them achieve their goals of maximizing growth while providing flexible income. Whether or not they decide to implement their custom-made Crash Proof™ strategy, First Senior was happy to provide them with this education free of charge.


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