Don’t Be Victimized By Variable Annuities
Variable Annuities
Annuity sales are an area that is often fraught with endless abuses. Due to this, the nation's securities cops have proposed tightening the rules regulating annuity sales. But you can't expect the industry to clean up their act without a fight. The insurance lobby will keep this popular vehicle alive and breathing at all costs.
The commissions that insurance agents and securities brokers receive for selling these vehicles are just too wonderful to resist. The commission received on the sale of a variable annuity is likened to the length of the surrender period. In other words, if the surrender period is 9 years (the average) the commission paid is approximately 9%. However, surrender periods can extend out to 15 years, and yes, the commission earned by the agent is between 13% and 15%!
You need to understand the moving parts of the variable annuity to protect yourself from purchasing this popular product when it is unnecessary. A variable annuity is an "uninsured" securities/insurance product that provides investment options, much like mutual funds, for long term investors, who want an extra way to save for retirement. Further, these investment options (sub-accounts) are packaged within a variable annuity on a tax-deferred basis.
Variable annuities are strictly supplemental retirement investments. They may suit some but they are not for everybody. The following demonstrates what you need to ask yourself in order to feel you qualify as being a person who should invest in this product. You should never buy one unless you can answer "yes" to these three questions"
- Do you max out your 401-K or other workplace retirement plan every year?
- Do you contribute the maximum each year to an Individual Retirement Account (IRA)?
- If married, does your spouse take full advantage of items one and two, above?
Consider this example of a situation where the decision not to get one is better than making the choice to get one - A married couple in their 50's with his-and-her IRA's and 401-K's could theoretically put up to $39,000 into their retirement accounts this year without ever needing a variable annuity. And even then, tax efficient mutual funds would be a far better place for our financial over-achievers to accumulate their overflow of cash.
Variable annuities simply cost too much. Because annuities are primarily insurance products, their fees typically dwarf those charged by mutual funds. This is simple to understand when you realize there are two players involved in this game instead of one.....the insurance company and the mutual fund company. Bringing the other player into the mix is what makes this arrangement unviable for most.
* Original article revised and edited by Tanya Frazer