Real World Scenarios: Variable Annuity Risks

Here is the fourth real world scenario in our series.

I know with a variable annuity I can invest in sub-accounts that are based on funds that contain various mixtures of stocks, bonds and money markets, but what are the actual risks involved?

That’s a very good question. If you purchase a variable annuity, you run the risk of the underlying investments performing poorly. This risk is balanced by the potential of receiving a higher return than would be possible with a fixed return investment. In addition, virtually every variable annuity offers a guarantee of principal (sum total of all premiums paid) to your beneficiaries in the event of death, but most now offer enhanced death benefits that will guarantee either a 5% or 7% compounded annual rate of return as a worst case scenario in the event that you die. Others offer a “step-up” on the anniversary date each year so that if the market goes down and you die your beneficiaries will receive the greater of the highest value of any previous anniversary or the contract anniversary (which ever is greater). Some variable annuities now even offer a combination of the aforementioned benefits, i.e. the greater of 5% or 7% compounded annually, the highest contract anniversary, or the actual account value on death to the heirs (see death benefits under compare annuities for more detailed information). Please note that there is almost always an additional charge for these benefits, so be certain to read the prospectus carefully before investing an money. On average these fees range from .05% to .50% annually, and are in addition to the standard mortality and expense risk charges and administrative fees.

The latest type of variable annuities are commonly called Living Benefit Annuities. They are also referred to as GRIPs (Guaranteed Retirement Income Program) or GRIBs (Guaranteed Retirement Income Benefit). With a Living Benefit Annuity the life insurance company guarantees (in most cases) that you will receive the greater of 5% or 6% compounded annually, the highest contract anniversary or the actual account value. There is typically a seven-year waiting period before you can exercise your GRIP or GRIB provision, and it always includes some form of annuitization, and an additional fee ranging from .25% to .50%. Contact an Annuity FYI expert to request a complete information kit and prospectus.

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