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Purchasing a Variable Annuity Direct? Consider This First


Despite Vanguard’s exit from the variable annuity sales sector this summer, there are still a plethora of choices for consumers who are shopping for a variable annuity. But just because there are options doesn’t mean you can blindly select any of them. As always, it’s important that you do your homework and research the pros and cons of such a purchase, especially when buying directly. Here’s a look at some pointers on the process from the experts at Kiplinger Magazine.

Variable annuities are a bit more complicated than some other types of annuities because they are part investment and part insurance. For example, with an immediate annuity you pay a lump sum to an insurance company and in return receive a guaranteed monthly payment. With a variable annuity however, you put your money in mutual-fund-like accounts and any gains are tax-deferred until you either withdraw the money or annuitize at the end of the contract. Income guarantees, usually ranging from 1-1.5% of the amount you invest, are typically offered.

Buying a variable annuity directly can be a simple process, with providers including Fidelity, Schwab, Nationwide and others, however there are pros and cons to be considered. Because your returns depend on the performance of the investment options you choose, there’s always the chance you’ll lose money. If you’re looking for a shorter-term investment, variable annuities might not be for you. While they grow tax-deferred, when you withdraw money you’re taxed at ordinary income rates rather than lower capital-gains rates. So not only will you get hit with hefty taxes but you might incur surrender charges too. In general, a variable annuity is best suited for the investor who doesn’t plan to access the money for several years. 

If you believe that a variable annuity is the right option for you, be sure to shop around to compare costs and options. Check the prospectus for details about investment choices and fees. Make sure you are clear on how the product works. Take note of how long the “free look” period is. Usually lasting about 10 days, the free look period allows you to cancel your contract without a surrender charge.

If you decide to use an agent or adviser to purchase a variable annuity, be sure to ask how that person is being paid. If the adviser earns a commission, they may steer you towards a higher-costing product, even if it’s not the best option for you. Also, a fee-based adviser might charge a fee for managing assets within the product itself. Familiarize yourself with whatever fees might be associated with the product you are interested in.

Additionally, before signing on any dotted line, decide what features are important to you. Options might include a rider for guaranteed income or a benefit for heirs. If leaving a bigger legacy is important to you, it might be worth paying more to get a guaranteed death benefit. But be cautious about options that are “sophisticated and richer” than what you want. The fewer bells and whistles an annuity has, the less it should cost.

Written by Rachel Summit

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