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Know the Details of Your Variable Annuity

In CNBC’s article “4 things you really need to know about your variable annuity,” Elizabeth MacBride offers important information about variable annuity products.  Sometimes this type of annuity gets a bad rap, but for the right person variable annuities offer great benefits.  The amount of money invested in variable annuities has grown to $1.7 trillion.  Variable annuities are like mutual funds that are issued through an insurance company.  You take advantage of tax-deferral during the accumulation phase as well as market increases and guarantees through the investment.  Guarantees used to be more generous before the market decline five or so years ago, but there are still valuable variable annuity guarantees out there.  The 6 and 7% guarantees really hurt insurance companies, so many are offering buybacks of some of their better variable annuity guarantees.  If you have a good guarantee with a GMIB, GMDB, or higher rates, it is probably in your best interest to keep that variable annuity.  Even though the times have changed when it comes to what benefits are offered by variable annuities, many variable annuity products are selling well.  If you are considering a variable annuity, there are some very important things to consider.

One of the most important things to consider is the fees associated with your variable annuity.  They are often criticized for their high fees.  What you really have to do with variable annuities is compare the fees with the value you are receiving.  Variable annuities can have many different fees, including mortality and expense risk charges, different types of asset-based fees, and administration fees.  They also typically have surrender charges if you take your money out before a specified surrender period has expired.  Your financial expert can give you the ratio of your annuity fees, which should include everything other than your commissions and any sales charges.  If you add on death benefits or guaranteed income benefits, your fees will be higher than those listed in the prospectus.  That makes it sound like variable annuities are all fees, but they are not.  It’s important to also take into account all of the benefits and guarantees that you will receive.  One of the greatest annuity benefits is that you are protected from outliving your money.  It can be hard to put a value on that kind of protection and peace of mind, so that is something that you have to take into account with your family and financial advisor.  Balance your concrete and abstract benefits with the fees that you will pay for your variable annuity.

Some people are unclear where they should own a variable annuity.  Owning a variable annuity in a taxable account provides you the benefit of deferring your income taxes until you start making withdrawals.  Annuities in 401k or IRA plans do not offer additional tax advantages, but you aren’t losing out on any tax benefits if you choose to own a variable annuity in those types of accounts.  The financial strength of your annuity provider is another important thing to consider.  Financial strength ratings are issued by four different companies; Fitch, Moody’s, A.M. Best, and S&P.  Your variable annuity is only guaranteed by the insurance company holding it, so you’ll want to ensure that they will be around to continue your lifetime income payments.  Most states do offer guarantees between $100,000 and $500,000, so that is also an important factor to research before buying your annuity.

Finally, if you already have a variable annuity, you want to take a good look at how valuable your product really is.  Those variable annuities issued prior to 2008 usually have better death benefits, more generous payout guarantees, and fewer restrictions when it comes to your investments.  If you have an annuity with better guarantees than you could buy today, you should likely keep that annuity in your retirement portfolio.  Speak with an expert who doesn’t have a vested interest in selling you a new annuity to determine if you should take a variable annuity buyout or not.  Some people, especially those who have failing health, may benefit from taking a variable annuity buyout offer.  Variable annuities are one of the most complex types of annuity, but that doesn’t make them a poor choice.  Know the details related to your variable annuity, especially if you already own one, and compare the benefits and value received to the fees and costs.

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