Variable annuities are the most popular annuities because they offer by far the best shot at capital appreciation. But it’s a safe bet that they haven’t been popular much of this calendar quarter, VA sales typically track the ups and downs of the stock market, and the stock market got off to an abysmal start in 2016.
Happily, the backdrop has markedly improved. Stocks have rebounded nicely and appear to be stabilizing, and so folks who put plans to buy a VA on the back burner no doubt have started shopping again.
This is probably a smart move at this time, and certainly less unsettling. But potential buyers should make sure they’re covering the bases required to buy a VA that is truly best for them.
Here are five tips:
* Be cognizant of the share class you buy. Different share classes have different fee structures. Flagship Shares usually have the lowest fees, offsetting the arguably negative fact that they have among the longest surrender fee schedules – six to eight years. At the opposite end of the spectrum are L Shares, whose fees are about 50 basis points higher. There are also Bonus Shares, which pay a bonus but have higher fees, and the Fully Liquid Option.
* Don’t automatically sidestep Bonus Shares because of their higher fees.
They may be best if the bonus is sufficiently generous to offset those fees for a long time. To determine this, divide the amount of the bonus by the additional annual cost of the VA and see how long it takes to come out even. If you’re still ahead after 10 years, it’s probably a good deal.
* If you buy a living benefit rider, make sure you buy an annuity from a highly rated insurance company. You’re in this for the long-term and want to make sure the annuity underwriter is rock-solid. The A.M. Best rating should not be lower than B+, even though a B rating is still investment grade.
* In buying a living benefit, make sure you select the premium that best fits your long-term goals. The options are a single premium and a joint premium. Some brokers don’t even mention the joint premium to couples because it pays less (since it covers two lives, not one). But you’ll be sorry if your spouse was the single annuitant and dies because the annuity payments will cease.
* Make sure you select a VA whose sub-accounts (stock mutual funds) mesh with your investment preferences. If you’re an aggressive investor, make sure you have at least a small handful of aggressive growth sub-accounts from which to choose. If you’re conservative, make sure the selection offered doesn’t force you to invest in a sub-account riskier than you prefer.
Written by Steve Kaufman