Last Updated: August 19, 2020

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Variable annuities are tax-deferred investment products, which permits the allocation of money into mutual funds held in “subaccounts”. A variable annuity does not guarantee returns on a principal. In this article, financial experts discuss whether variable annuities are a good investment choice for retirement.

Variable Annuities Offer Little Value To Retirees

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 are 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

There Is Practically No Reason Anyone Should Own A Variable Annuity

“From a fees perspective, there is practically no reason anyone should own a variable annuity over a no-load mutual fund. Generally, there are fees when you enter a variable annuity (i.e. the sales commission), then ongoing management fees and finally fees for early surrender. From a tax perspective, there is also no reason to own a variable annuity in an IRA. This is because the money already grows tax-free in an IRA. If a client is considering purchasing a variable annuity, they should consider their goals and whether it is more cost-effective to purchase different products. For example, if the client needs a death benefit it may be cheaper to purchase a term life insurance contract and a no-load mutual fund than to purchase a single variable annuity.

The problem with the industry is that most salespeople who sell variable annuities are not fiduciaries – as a result, they are not obligated to present their clients with lower-cost alternatives.”

Marc Fitapelli, Esq., Fitapelli Kurta 

Annuities Are Not Investments – They Are Insurance

“Annuities aren’t investments. They’re insurance.

Let me explain…

When you buy an annuity, you are insuring your future income as well as your capital. And like most insurance products, they’re expensive. When was the last time you paid your auto or homeowners insurance and thought, “That bill seems reasonable”?

You pay an insurance company a sum of cash, and it invests it. Then it gives the money back to you in drips and drabs. In most annuity contracts, you are guaranteed a certain amount of income, often for life. You pay fees and commissions for that guarantee. Not only that, but the insurance company is making money on your money while it returns slivers of it back to you each month or quarter.

To the people who’ve bought their annuities and are satisfied, I’m happy for you. I hope they give you the peace of mind you paid for.

For anyone doubting whether these are awful products, consider that a new rule was passed by the Department of Labor in 2016 that would make annuity salespeople (and other financial professionals) fiduciaries. A fiduciary has a legal obligation to do what’s best for their client and not for themselves or their firms.

You may be surprised that most insurance and stockbrokers are not fiduciaries and can pretty much sell you any financial product that is “appropriate,” no matter the cost.

In other words, if you’re a conservative investor who can’t afford to take any risk, your broker can’t sell you penny stocks. But they can sell you a mutual fund with a 5% sales fee and high annual fees rather than a similar fund with low fees.

A fiduciary can’t do that. A fiduciary has to find the best product for you at the best price.

This is important because when the 2016 fiduciary rule was passed – simply passed, not enforced – annuity sales fell off a cliff. Annuity salespeople ran for the hills rather than risk running afoul of the law by selling these garbage products.

Annuity sales fell 8% in 2016 and 18% in 2017. Sales of variable annuities, which are the worst annuities, plummeted 22%in 2016.

So ask yourself why these salespeople, who had success selling products they supposedly believed in, suddenly stopped selling them at the slightest hint that they would be held accountable for any bad advice or unethical recommendations.

Note that the rule that would have made brokers fiduciaries was scrapped by the Trump administration, so these products are once again being foisted upon unsuspecting investors.

Other problems that I have with annuities include the fact that your money is locked up for a certain amount of time with significant penalties for early withdrawal. Also, annuities limit how much upside you can make in a bull market. Finally, in some annuities, if you die before you’ve received all of your money back, that’s just too bad for you and your family. The insurance company keeps the funds. If you want to make sure that doesn’t happen, you pay for it.

If you need to ensure a certain amount of income for a set period or the rest of your life and are willing to pay for that guarantee, an annuity may help you sleep at night. That’s what they’re designed for.

But make no mistake about it… Annuities are also designed to generate huge profits for the insurance companies and people who sell them.

I believe those huge profits are better off in your pocket than in an annuity salesman’s.”

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

It would seem that the consensus is that variable annuities are not a recommended investment product. If however, you are interested in this type of annuities, factor in what the financial experts have discussed in this article, do your research, and most importantly, consult a wealth advisor.

Sarah Bauder

Sarah Bauder is a financial writer with over a decade of experience at numerous online publications, writing about alternative investments, retirement, US politics, world economy and more.