Variable annuities are insurance products. These contracts are marketed by insurance companies as investments. However, due to fees, surrender charges, tax issues and limited investment choices, annuities should be avoided if possible.
Generally, two versions are offered: immediate and deferred. With immediate annuities, you give the insurance company a lump sum of money and they promise you an income stream for your lifetime or for the life of both you and your spouse. With deferred annuities, your money is invested in a mutual fund-style account until you either withdraw it or annuitize it.
You’ll find that most financial advisors who are paid a commission (brokers and fee-based financial advisors) strongly recommend variable annuities. Unfortunately, the reason for this often has more to do with the high commissions that they are paid rather than what is best for you. Fee-only financial advisors typically do not recommend variable annuities.
Why do fee-only financial advisors stay away from these types of investments? In short, there are almost always better investments available. Some of the negative aspects of annuities include high fees (2-4%); disadvantageous tax consequences on withdrawal; long surrender periods (typically 7-20 years where you pay a penalty for withdrawing funds) and the lack of a step-up in basis for your non-spousal beneficiary.
Are there any times when annuities make sense? As I noted, generally there are better investment options. However, immediate annuities may make sense for a small number of people who feel the need for a guaranteed income stream (beyond Social Security and/or employer pensions) or who are pretty certain that they’ll live longer than an average person.
You can always purchase a variable annuity if you determine that it’s right for you, but you’re pretty locked in once you do. Therefore, it makes a lot of sense to review your situation with an independent, fee-only financial advisor before you make a move. Guidepost Financial Planning can help you sort through your options. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.