If you are considering the purchase or if you already own a variable annuity make certain you fully understand how they work. Annuities can be a good decision and they can also be your worst nightmare. The difference depends on how the benefits of a variable annuity can benefit you Listed below are 10 things to fully understand before buying a variable annuity.
10 Important Points about Variable Annuities
No Guarantee of Principal:
Variable annuities have no guarantee of principal and this means 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..
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.
Other Fees and Expenses:
Variable annuities can charge fees for added riders and benefits. Each benefit can have a cost associated with it 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.)
Loads and Acquisition Expenses:
Some variable annuities have a front end or a back end load that can have an effect on the overall performance of your variable annuity. (Please read the prospectus, which by law must reveal fees and expenses.)
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.
State Guarantee Protection Exemption:
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 there for are not in need of this protection. Fixed and immediate annuities are protected by the State Guarantee Fund.
Variable annuity sub accounts can be subject to the volatility and the whims of the stock market.
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 you’re your account value.
Death Benefits can Contain Tax Liability.
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. Make certain you fully understand these tax implications of a variable annuity.
Confusing and Hard to Understand:
Variable annuities contain fees, expenses and it is important to fully understand how they work and how their features can benefit you.
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 ask for assistance from the salesperson or a trusted advisor.