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Are there any Variable Annuity Benefits? Of course, otherwise, variable annuities would not exist. However… Do your homework. The benefits of variable annuities will let many investors reach their retirement goals, but they also have some negative aspects that you need to be aware of.
Variable Annuity Pros and Cons:
With all the pros and cons associated with these annuity products, they can be beneficial for one person and yet hurt the investments of another. In order to help you decide if variabel annuities will meet your needs and help you reach your retirement goals, lets take a look at some of these pros and cons:
“Up” Sides:
Unlimited Contribution: This benefit of variable annuities is often overlooked. The reason for this is unlike other retirement plains (like IRAs, 401Ks, etc.), variable annuities don’t have a cap on any given year’s contribution amount. For this reason, variable annuities are a terrific way to distribute larger amount of money without being hampered by a yearly contribution limit.
Guaranteed Death Benefit: This variable annuity rider will ensure that a certain amount of money is paid to your beneficiaries in the event you pass away before the contract expires. The amount of money paid by the guaranteed minimum death benefit can be determined in two ways. It can either be the same amount as the initial investment, which will shield your beneficiaries from an untimely market downturn, or it can be the principal amount plus a contractually-specified yearly interest credit. Of course, if either of these amounts are exceeded by the investments, your beneficiaries would end up getting the full value of the account, which would render the benefit null and void.
Guaranteed Income Benefits: variable annuities have a myriad of income benefits, so we’ll stick to two of the most common.
If you plan on annuitizing your annuity (making it a steady stream of income), you will want to look into a guaranteed minimum income benefit (GMIB). What that means is, even if the current market is on the unhealthy side, you will earn a guaranteed amount of money. This allows you to keep your money invested in the market, while knowing you have a reliable income, as well as take advantage of an increased income when the market is doing well. It also protects your base payment from a market downturn.
If you want to take advantage of the guaranteed lifetime withdrawal benefit (GLWB), you will have to do so while your annuity is in the accumulation stage. Using this rider, you are guaranteed to be able to withdraw and amount that is equal to your initial investment plus an annual interest credit, usually 6%-7%, no matter how the rest of your account value is performing in the market This benefit will protect you from a market slump despite the fact that the annuity follows market trends. Plus, once you start to use your annuity for income, your account will still vary based on market performance, allowing you to experience increases in your monthly payments over time.
Tax Deferral: Certain plans allow this feature to be used, but most private accounts prevent this. Any securities that are not protected by annual taxes will not do as well as those securities, of the same monetary value, that are protected from this annual taxation. It is surprising how much annual taxation can actually take away from your retirement fund. Most people do not use their mutual fund shares to pay their taxes, without thinking about the consequences. What they do is either take a smaller refund, or make the payment from another account. So, the account is not what suffers, but your pocketbook does.
Negatives: High Fees: Experts agree this is the most important factor. Any riders you decide to include in your variable annuities is associated with a fee. When you incorporate all the bells and whistles, your annuity contract can have fees as high as 3%. This is a terribly high amount, one that will cancel out any tax advantages you’ll have received from your annuity strategy. The fees associated with variable annuities need some serious evaluation. So what good can come of these extra riders? Are they really even necessary at all? By getting rid of some of the riders, you will be able to decrease the annual fees you will have to pay.
Limited Investment Choices: the options for allocating assets in variable annuities are usually limited to about 30-40 different funds. This means that as the market changes over time, you will be have less ability to change your investment strategies. The number of options is far greater than the number available in most 401Ks, but it pales in comparison to the options you have in an IRA or a private account. If you have a family of funds that you favor, you may be satisfied with that but active traders will likely want more freedom than annuities can afford to give.
Inflexibility: When looking at annuity contracts with GMIB or GLWB riders, you may find that any ‘guaranteed’ amount that is received will not safeguard your principle, instead, it only safeguards your future withdrawals. This is kind of confusing but critical to understand if you want to find the best combination of safety, flexibility, and profitability. A variable annuity with GMIB or GLWB riders limit your flexibility a lot. Additional free resources on these products are available by clicking on our links listed below.
If you are thinking about investing in variable annuities, the information in this article should help you get started on the right foot. Don’t forget there are a host of other factors an individual must consider before a long-term decision is made. It is very important that you have a full understanding of all the benefits and drawbacks of variable annuities before you decide they are the way to go.
For a more in depth analysis of the pitfalls of Guaranteed Lifetime Withdrawal Benefit annuities, be sure to visit AnnuityStraightTalk.com for a free report. Please also look for our Annuity Report that will tell you everything you need to know, not just what you want to hear.