Arguments Against Variable Annuities Often Include Misinformation

There are some people who vehemently oppose variable annuities, often without knowing the details of these products.  In Tom Hegna’s Producers eSource article, “The 3 Primary Variable Annuity Objections and How to Handle Them,” the author lists the three reasons that most people dislike variable annuities.  While these reasons may make a variable annuity the wrong product for some people, they are not accurate arguments against them for many others.  Misinformation sometimes leads consumers on a road away from variable annuities when they might be the right product for them.  People in their late 50’s who don’t have a pension and people with high income who have contributed all they can to their 401k plan are just two groups who should consider variable annuities.

Yes, variable annuities have fees.  Yes, they are higher than some other products.  But the fees are fair given all of the benefits that variable annuities offer you financially.  The fees for variable annuities are directly related to the guarantees that they offer.  Some have a Guaranteed Minimum Accumulation Benefit (GMAB), while others have a Guaranteed Lifetime Withdrawal Benefit (GLWB).  These benefits are not available with any other products, especially not those with lower fees.  You are paying for the assurance that your account will not lose value and will increase in value depending on market performance.  Annuities offer better returns than many products, especially CD’s offering less than 1% returns currently.  The best way to minimize your fees with variable annuities, or any annuities for that matter, is to only pay for the risk protection that is important to you.  Don’t add on protection that isn’t necessary and pay added fees.

The second argument that some people have against variable annuities is that they are taxed at the income tax rate rather than the capital gains tax rate, which is lower.  One thing to remember is that not all of your annuity payments are taxable, only the portion that is not a return of your capital.  Capital gains tax breaks are only given when stocks or mutual funds are held longer than a year.  This is quite often not the case, especially for day traders.  Many mutual funds have high turnover rates as well.  Even though on paper this tax difference seems like an issue, when you see the details it might not make any difference at all.

Finally, annuities are not given a stepped-up cost basis at death.  Stocks and mutual funds do offer this, but some stipulations are overlooked.  With mutual funds, investors pay taxes each year on fund distributions, even if your mutual fund loses value.  You often pay for a lot of the stepped-up cost basis through your own taxes anyways.  Annuities don’t get the stepped-up cost basis, but they also don’t get the stepped-down cost basis at death either.  Annuities that have guaranteed death benefits protect one’s heirs from losing money when the annuity holder dies.  This benefit overrides the other when you take into consideration all of the investments that lost money over the past five to ten years.  Variable annuities are definitely the right product for some people approaching retirement.  Take all of the pluses and minuses into account to see if the peace of mind you will get from their guaranteed income and investment will make an annuity right for you.

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