Should An Investor Stay Away From A Variable Annuity? – 5 Experts Weigh In

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A variable annuity is a tax-deferred insurance product, which permits money to be allocated into mutual funds referred to as “subaccounts”. Yet unlike a fixed annuity, variable annuities do not guarantee a return on the principal. In this article, 5 experts discuss whether an investor should stay away from a variable annuity.

 A Variable Annuity Is The Worst Investment You Can Make

 “Variable Annuities are the worst investment you can make. Variable annuities are very expensive and cap your upside. They are such terrible products that when the Department of Labor passed a rule that would require advisors to act in their client's self-interest, sales of variable annuities fell off a cliff.

The Trump administration has since killed the rule and annuities sales have rebounded.

If these were such great investments, why did sales plummet when suddenly the people who sold them would face consequences for putting investors into these products?”

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Money To Invest, Need, Contract Type, Risk Tolerance

 “There is no right or wrong answer to this question. Whether a variable annuity might be an appropriate option for an investor depends on the following:

How much money does the person have to invest? That is the starting point. There should exist a reasonable amount of investible assets prior to considering an annuity. It is generally not prudent for an investor to invest 100% of their investible assets in an annuity contract, but for some of their money [25-50%], for the right reason [tax-deferred growth, guaranteed income and/or death benefit, estate planning] it may make sense.

Need: what is the objective of the investor? Are they looking for tax deferral on the growth of money over a longer period of time? Are they looking for guarantees of income and/or death benefit, which can, for additional fees, be offered inside a variable annuity contract?

Contract type: does the investor understand that a variable annuity is an insurance contract issued by an insurance company? Does the investor understand the underlying fee structure of the annuity?

Time: how long before the investor might need to begin withdrawing money from the annuity? Annuities have specific provisions for withdrawals and are not considered fully liquid investment vehicles. If there will be a need for the money inside of a shorter time horizon then the variable annuity may not be suitable.

Risk tolerance: Variable annuities generally have exposure to the stock market due to the underlying investment options being variable sub-accounts, very similar to mutual funds. The risk tolerance of the investor must be evaluated.”

Jimmy Masters, AIF(r) CRPS(r), Vice President – Investments, The Alcaraz Fisher Justis Wealth Management Group of Wells Fargo Advisors  

A Variable Annuity Can Be Appropriate For Some Investors As Long As They Understand What They Are Getting Into

 “Variable annuities can be appropriate for some investors as long as they understand what they are getting into. Any investment that also has an insurance component is going to be expensive. This increased expense results in decreased investment performance. Variable annuities are appealing to some because they guarantee limited losses or no losses in some cases, however, they also restrict the upside. If an investor has a long time horizon and doesn’t need the insurance protection, they are almost always better off investing in stocks, bonds, ETFs, or mutual funds.”

Blake Murphy, CIMA, Financial Advisor, California Wealth Transitions

A Variable Annuity Offers Little Value Given The Availability Of Products Carrying Better Guarantees

“In my opinion, variable annuities offer little value to retirees given the availability of products carrying better guarantees and the inefficiencies these products inherently carry. I liken the variable annuity to the duck boats of World War II attempting to solve too many needs for the investor within a single vehicle, most often riddled with riders usually misunderstood and unnecessary inhibiting the long-term growth of cash value, typically ranging from two to four percent per year. The most common is death and income benefit riders. Death benefit riders offer guaranteed growth available to beneficiaries taxable at ordinary income tax rates when tax-free life insurance could have provided a better benefit. Income riders offer a guaranteed lifetime income, however, better guarantees can be found with immediate and fixed indexed annuities. Even with no riders, there is always a base fee, typically one percent, called an M&E charge, on top of the cost of the investments held inside the contract. A potential benefit is tax deferral of which is only a benefit to those in the highest of tax brackets and can ultimately be a detriment to the client as it will be taxed as ordinary income when distributed.”

Casey Weade, CEO, Howard Bailey Financial, Inc

It Depends On The Investor Profile, Age, Tax Bracket, Risk Profile And, Investment Objective

“Like any other investment, reasons to invest or not invest in a variable annuity depends on a variety of factors such as the investor profile, age, tax bracket, risk profile and, investment objective. The main reason to invest in a variable annuity is to have a growth-oriented vehicle where the growth is tax-deferred and whose main purpose is supplemental retirement income on top of investments in qualified retirement plans.

Of course, one of the main arguments against variable annuities are the fees that can be quite high, sometimes as high as 3% in their entirety. But over the past decade, variable annuities that provide automatic increases to the base (investment) and generate guaranteed lifetime income at some point in the future have become extremely popular with many investors. The reasons are twofold – first, these variable annuities attempt to replicate defined benefit pension plans of a past era. Income is guaranteed for life regardless of the performance of the underlying investments and even if the value of the variable annuity is exhausted which brings me to my second point. Investors who are concerned about precipitous market declines that can adversely affect the value of the variable annuity can protect their families in the event of their death through the death benefit in variable annuities. In the event of the death of the annuitant, the beneficiary receives the greater of the investment minus any withdrawals or the value of the contract whichever figure is greater. Often in the past, annuitants have passed away during market declines and their families receive the higher death benefit.”

Cliff Caplan, CFP(r), AIF(r), Neponset Valley Financial Partners

The consensus appears to be that a variable annuity may not be the best investment option given its numerous drawbacks. However, in certain situations depending on the investor, variable annuities could be a good choice for a diversification strategy. If you are interested in a variable annuity, it is highly recommended to do your due diligence and consult a financial professional before investing.


Sarah Bauder
Sarah Bauder

Sarah Bauder has a decade of experience at numerous publications, writing about finance, politics, economy and more.

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