Variable annuities can provide many benefits; however, make sure you understand exactly how they work.
There are two types of annuities sold in America, those sold by insurance agents which are called fixed annuities and those sold by security licensed agents which are called variable annuities.
Variable annuities and fixed annuities are very different creatures. Fixed annuities earn a set rate of interest for a specific time period. Fixed annuities have no fees and no expenses. What you earn is what you get.
Variable annuities invest your funds in separate accounts (sub accounts) that invest in securities such as stocks and bonds, etc. Each separate account will offer specific investment objectives, you select the accounts that will best help you reach your goal.
Here are specific points to understand before investing in variable annuities:
- No guarantee of principal, your account can gain and lose value. Variable annuities have stock market risk (and reward)
- Fees, a variable annuity charges fees for the contract, fees for administration, fees to manage your money and if you have chosen an additional rider, a fee for it. Here is an example of possible fees associated with variable annuities, these are merely examples, your actual fee schedule is located in your prospectus:
- Mortality and Expense fee 1.25%
- Administration fee .15%
- Sub account management fee (varies) .50% to 2.00%
- Income rider fee (varies) .50% to 2.00%
- Death benefit enhancement fee varies
3. Surrender penalties can be lengthy, some as long as 8 years. Make sure you fully understand your contractual access to your funds.
Just like all investment vehicles, variable annuities have their place and can be a good choice, just make sure you understand the moving parts and the fees associated with them.