By Gary Meeks, RICP®
Variable annuities (VAs) are complex and often misunderstood investment products. Variable annuities and annuities in general are also often criticized by some in the media. I heard one commentator in a TV commercial say he would rather die and go to hell than buy an annuity. He then went on to push his own investment services without much explanation as to why he hates annuities so much.
So, are variable annuities to be avoided at all costs? The answer is “no.” Variable annuities may provide valuable benefits not available with other investment products, but it is important to understand the benefits, features, and cost before investing.
A variable annuity is a tax-deferred investment in which your money is typically invested in mutual funds and which has certain standard benefits and optional benefits not found with straight mutual funds. Here are some common features of variable annuities that investors should be aware of:
• Tax-Deferred Growth: Earnings in a VA are tax-deferred until you make a withdrawal. Tax laws require that when withdrawals are made, earnings must come out first. Essentially, money that would normally be paid in taxes remains invested and grows tax deferred until withdrawals start. There is no additional tax benefit if qualified or IRA money is invested in a variable annuity.
• Guaranteed Death Benefit: The guaranteed default death benefit on most VAs is the initial investment less withdrawals or the current account value at death, whichever is greater. Most VAs offer enhanced death benefit features for an additional fee.
• Optional Living Benefit Riders: These features vary widely by product and come with an additional cost. One popular living benefit rider is the Guaranteed Lifetime Withdrawal Benefit, or GLWB. The GLWB guarantees that a certain percentage (typically 2-8%; often based on age) of the guaranteed income base can be withdrawn each year for life. The guaranteed income base is usually the initial investment, which may increase each year by a fixed rate and/or market value step up until lifetime withdrawals begin.
Things You Should Know:
• Variable annuities usually have a surrender charge for the first several years. Surrender charges often decline over a period of 5-7 years. An example would be a 7% surrender charge in the first year, declining 1 percentage point each year until it is 0 after year seven. Most variable annuities will allow a percentage of the initial investment to be withdrawn each year without a penalty, usually 10%. You should also be aware that withdrawals made prior to age 59 1/2 will incur a 10% tax penalty and income tax on the earnings withdrawn.
• Expenses: The additional benefits that are available with a variable annuity come with a cost. It is not uncommon for the total expenses to be three times or more what it might cost to invest in straight mutual funds .
• Variable Annuities are Complex Products: As stated earlier, variable annuity products and features vary widely. It is very important to read the product disclosures and prospectus, and to ask questions of your financial advisor to make sure you have a good understanding of the product, its benefits, costs and risk before investing.
Gary D. Meeks, RICP®, is a registered representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker dealer and Registered Investment Adviser. Cetera is under separate ownership from any other named entity. 90 W 100 N STE 6, Price, UT 84501 (435)-637-8160.
Investors should consider the investment objectives, risks and charges and expenses of the variable annuity carefully before investing. An investment in a variable annuity involves investment risk, including possible loss of principal. Variable annuities are designed for long-term investing. The contract, when redeemed, may be worth more or less than the total amount invested. Variable annuities are subject to insurance-related charges including mortality and expense charges, administrative fees, and the expenses associated with the underlying sub-accounts. The prospectus contains this and other information about the variable annuity. Contact Gary D. Meeks at 90 W. 100 N. STE 6 or 435-637-8160 to obtain a prospectus, which should be read carefully before investing or sending money.