Understanding Variable Annuities: Pros and Cons

By |2013-09-25T20:40:13+00:00June 7th, 2012|Annuities, Annuities 101|

Like all annuity options, variable annuity pros and cons drive the decision-making process. If you are considering the purchase of a variable or fixed annuity or if you already own variable annuities, make certain you fully understand in comparison how they work. Variable & Fixed annuity comparisons will make your decision easier.

Understanding variable annuity pros and cons, as well as the similarities and differences between fixed and variable annuities is an important part of the process. Compare variable annuities and fixed vs. variable annuities to make sure your annuity fits your needs. An annuity can be a good decision or your worst nightmare. The difference depends on understanding the pros and cons of variable & fixed annuities and how a given annuity benefits you.

Listed below are 10 things to fully understand before buying a variable or fixed annuity. The first important pros & cons to know about variable annuities are that: A Variable Annuity is a security. Funds invested in Variable Annuities are subject to market conditions; your money is exposed to gain and loss.

1. No Guarantee of Principal:

Variable annuities have no guarantee of principal; in the event of a need for money you may not have your original deposit. Your original deposit is only available to your beneficiaries if paid as a death benefit.

2. Death Benefit Expenses:

The mortality cost is in your contract and is subtracted from your account. Depending on the variable annuity you own or are considering, these fees could be as high as 1.25% of your total account value.

3. Other Fees and Expenses:

Variable annuities can charge fees for added riders and benefits. Each benefit can have an associated cost that is subtracted from your total account value. It could be possible that these fees and expenses could be as high as 1% to 2%, and these fees are on top of the death benefit fees discussed in number 2 above. (Please read the prospectus, which by law must reveal fees and expenses, when doing comparisons.)

4. Loads and Acquisition Expenses:

Some variable annuities have a front end or a back end loadthat can have an effect on the overall performance of your variable annuity. (Please read the prospectus, which by law must reveal fees and expenses.)

5. Administration Fees and Distribution Costs:

Many variable annuities charge a fee for administration expenses. These fees can range from .15% to .40% of your total account value and these fees are in addition to other fees in your contract.

6. State Guarantee Protection Exemption:

Unlike Fixed, Variable annuities are exempt from the state guarantee protection act because the invested assets are not at the insurance company, they are with the investment accounts, and therefore do not fall under the protection of the State Guarantee Fund. Fixed and immediate annuities are protected by the State Guarantee Fund.

7. Market Volatility:

Variable annuity sub accounts can be subject to the volatility and the whims of the stock market, which could have its pros in a healthy market.

8. Additional Compensation to the Broker/Salesperson:

Salespeople who sell variable annuities will continue to receive annual compensation from your variable annuity. This compensation is subtracted from your account value. Consider this as part of your comparison.

9. Death Benefits can Contain Tax Liability:

One of the possible cons is that any accumulated value in your variable annuity over and above the total of the deposits is fully taxable as ordinary income. This tax is passed on to your heirs. In a comparison make certain you fully understand these variable annuity tax implications.

10. Confusing and Hard to Understand:

Variable annuities contain fees and expenses, so it is essential to fully understand & compare how variable annuities work and how their features can benefit you.

Compare All the Pros & Cons When Considering Variable & Fixed Annuities

If you are considering a variable annuity, it is important to compare different products, because many contracts are designed for certain specific goals. Understanding the pros and cons of variable annuities and comparing variable annuity contracts to Fixed Annuity contracts will help the consumer make the best decision based on individual needs. In some cases a fixed annuity is the preferred option; just as in some cases a variable annuity may be best. There are benefits associated with variable annuities such as tax deferred growth and the ability to provide income. Please make certain you fully understand how these products work. Always read the prospectus and if anything is unclear in the comparisons, ask for assistance from the salesperson or a trusted advisor.

About the Author:

Bill Broich
Bill Broich is a well-known annuity expert with over 30 years of experience. He has written hundreds of articles on annuities and other financial topics, and has been a featured commentator on TV, Radio and the Internet. To follow Bill's profile, click here.