A closer look at a long-popular option.
provided by Los Angeles Financial Planner, Rose Greene, CFP®
Variable annuities are being reintroduced to a broader audience. These tax-deferred savings vehicles are getting a second look – a new look – from pre-retirees and retirees who want more income for their futures.
All annuities have things in common. An annuity is a contract between you and a life insurance company that promises you lifelong income in exchange for a lump sum payment or series of payments to the insurer. The income arrives in periodic payments, either at once (an immediate annuity) or in the future (a deferred annuity, which also offers you tax-deferred growth of the assets inside it).1
These tax-deferred savings vehicles are getting a second look – a new look - from pre-retirees and retirees who want more income for their futures.
The limitations of a fixed annuity. In a fixed annuity, your money grows at a fixed rate. At first that kind of financial predictability sounds wonderful, but there are two problems that come with it. One, your rate of return might be meager compared to what you could earn in the stock market. Two, inflation is going to make that fixed return worth less and less with the passing years, unless you pay (possibly through the teeth) to have the rate of return adjusted.
The variable annuity difference. In a variable annuity, you may direct part of your contributions to mutual fund-like subaccounts. The assets in a subaccount may be allocated across a mix of stocks, bonds and money market funds. The payout stream of the annuity reflects the performance of the subaccounts. Some variable annuities are called index annuities, because they are keyed to the performance of a major stock index, such as the S&P 500. (Incidentally, administrative fees on variable annuities can be lower than those charged on fee-based accounts.)
The strengths of a variable annuity. Many variable annuities let you benefit from stock market gains while shielding you against stock market losses. In the past, many have offered the annuity holder at least a minimum rate of return (a GMIB, or Guaranteed Minimum Income Benefit). Many have also offered guarantees that the annuity value will not dip below the value of the initial principal (a GMAB, or Guaranteed Minimum Accumulation Benefit).2
In addition to “living benefits” of this sort, variable annuities don’t have contribution limits like a 401(k) or an IRA – you can pour as much money as you want into one. You also aren’t required to take money out at age 70½, as with a traditional IRA.3
Also, variable annuity assets aren’t simply poured into an insurance company’s general fund (as is often the case with a fixed annuity). That’s useful if the insurance company hits a financial snag – you don’t want them diverting or borrowing your money for some other use. (However, the “living benefits” on a variable annuity are usually paid from an insurer’s general account.)4 Variable annuities are SEC-regulated.5
Interesting options. As they are insurance products, variable annuities can include or be structured to include GMIBs, GMABs, long term care insurance options and even bonus credits, in which the insurer adds a small percentage bonus to any contributions you make to the annuity. An impressive 96% of variable annuities sold in 2008 included guaranteed life benefits of some kind.6
There is naturally an insurance benefit: should you die before the annuitization phase begins (that is, before you start receiving income from the annuity), your designated beneficiary is guaranteed to receive the dollar value of what you have contributed to the annuity, or some guaranteed minimum (sometimes defined as all prior purchase payments made with any prior withdrawals subtracted).7
If you’d like to know more about variable annuities, talk to a qualified insurance or financial professional today.
Rose Greene is a Representative with Rose Greene Financial and may be reached at www.rosegreene.com, (310)399-1200 or rose@rosegreene.com.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Citations.
1 investopedia.com/articles/04/111704.asp [11/17/04]
2 investopedia.com/articles/retirement/08/variable-annuity.asp [2008]
3 thestreet.com/story/10438425/2/deathmatch-iras-vs-annuities.html [9/19/08]
4 nydailynews.com/money/2009/05/05/2009-05-05_is_your_annuity_or_life_insurance_policy_safe.html [5/5/09]
5 finra.org/Investors/ProtectYourself/InvestorAlerts/AnnuitiesAndInsurance/p006045 [5/5/09]
6 ifawebnews.com/2009/04/07/survey-nearly-all-variable-annuities-include-guaranteed-life-benefits/ [4/7/09]
7 sec.gov/investor/pubs/varannty.htm#dben [6/12/09]
