Justin Mailhes with Argent Advisors in Monroe Explains
What are variable annuities?
They are contracts sold by an insurance company that is designed to help accumulate assets to provide lifetime income for retirement. There are some circumstances where these are appropriate, but you need to fully understand the product beforehand. Here are a few of the myths:
- The Cash Value is the Annuity Value
Most variable annuities have two values and salesmen often do a poor job of explaining the difference. The annuity value is the amount the insurance company will base the lifetime payments on, while the cash value is the amount you could get if you want to cancel the contract. Most guarantees (guaranteed minimum income riders) apply to the annuity value not the cash value. Its not uncommon or the cash value to decline well below its initial amount invested during the contract life.
- Your Money is Safe
Unlike a fixed annuity, your cash value is not guaranteed since the money is invested in mutual funds. As the name &ldquovariable annuity&rdquo states, the cash value or contract value will move up or down with market conditions. Also, the annuity is issued, and backed by the insurance company selling the contract.
- Your Fees are Low
Variable annuities have fees, charges, and commission tacked on them. Surrender charges may apply when you buy an annuity and then decide you want out. Then there are annual fees and administrative/mortality/expense charges that could range from 1% to 2.5%. These plus various investment charges can easily bring fees around 2.5% to 3% annually.
Summary
Variable annuities may have a place in certain portfolios. They should be bought with the intention of using the annuity (lifetime payment) features, but not as an investment vehicle. Shop around and always know what you are buying.
