Recently I visited a website that provided financial education for people nearing retirement. An article on the site told potential variable annuity buyers to read each product prospectus thoroughly before investing.
I was slightly surprised by that. Virtually no one reads VA prospectuses thoroughly. Today’s prospectuses can be hundreds of pages long. Half of the pages focus on the mutual fund (i.e., subaccount) options, and a contract may offer scores of funds. Even advisors don’t read prospectuses; they subscribe to services that do it for them.
You should look at the prospectus, but fast-forward to the important stuff. I concentrate on three areas: the Fee Table, the section on “Optional Living Benefit Riders,” and the sub-section on “Investment Restrictions.”
On the fee table, look for the Mortality & Expense Risk charge, the current (and maximum) fee for the income rider you want (either the single-life or joint-option), the current fee for the death benefit rider you want, and the range of fees for the subaccount investments. These are your annual expenses.
Then flip to the Living Benefit Rider section. Check out the annual bonus, if any, that you can get by delaying withdrawals. Then look at the so-called “age bands” that tell you the percentage of your guaranteed income basis you can receive each year for life.
Finally, under the same section, look for a subhead that says “Investment Restrictions.” Typically, if you choose an income rider, certain high-risk funds will be off limits to you or a cap will be fixed on the amount you can invest in certain funds.
Not all prospectuses are organized exactly alike. But if you consult the table of contents (or use the search window, if you’re reading a pdf online), you should be able to find what you’re looking for quickly.
Written by Kerry Pechter