PDF Variable Annities and Variable Life Insurance Regulation (November 2016 Edition)

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In the event that your VAs have lost value by the time of your death, they come with a benefit that typically guarantees at least the amount of your purchases. Many annuities offer other optional insurance riders at additional cost, as well. Fourth, variable annuities lack the liquidity of mutual fund investments. Because of high sales commissions and the insurance component, most VAs have a surrender charge to exit the VA for a period of time ranging from a few years to a decade after purchasing it. The first reason is cost. According to Vanguard, the industry average annual cost of a variable annuity is 2.

The 50 Best Annuities: Guaranteed Income for Life - Barron's

You can buy a diversified portfolio of low cost index mutual funds for approximately. This means investing in a VA is over 20 times more expensive. This is a tremendous burden to overcome to come out ahead in the long run. Worse than cost is the lack of value, often hidden in endless layers of complexity. However, most people do not understand what they are getting. For example, a big sales pitch for variable annuities is the advantageous tax treatment.

However, depending on your situation, there may be no tax advantage, or the taxation of the investment may actually work against you. Variable annuities have absolutely no tax advantages if held in retirement accounts.

However, advisors will often have clients roll k accounts over to these high fee products when changing jobs. This was our case and that of two of my three family members that owned VAs. Again, these were not rare occurrences. According to the National Association of Variable Annuities, fifty five percent of all variable annuity assets are in IRA rollovers and qualified retirement accounts. Even for taxable investments, the advantages are overstated. Investments are not subject to annual taxation of dividends, interest and capital gains.

However, the contributions are not deductible and having the income and gains eventually taxed as regular income instead of generally more favorable capital gains rates can actually be a disadvantage to investing in VAs. VAs generally are not beneficial for tax reasons unless you first max out all other investment options k , IRA, HSA, etc which have the same or better tax benefits and lower costs.

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Even then, further analysis is required to see if the tax benefits of a VA will be favorable enough to outweigh the costs. Insurance is another big selling point of VAs. The sales pitch is that VAs offer the upside of mutual funds while insuring investments against loss. Again, many people do not understand what they are getting or how much they are paying for these benefits.


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For example, most VAs have a death benefit, at an industry average annual expense of. For this fee, your initial investment is guaranteed against loss. Put this benefit into perspective. It costs approximately four times more than the all-in investment costs of simply investing in index mutual funds. It is an annual expense on your entire portfolio that will generally grow with the portfolio. Plus, it guarantees only the amount you invested, not income or gains. In order to ever benefit from the insurance, you would need to die AND at the time of your death your initial investment would have to be down in value AND your beneficiary would need the money immediately and not be able to simply wait for the investment value to recover.

Guarantees expose insurers to market tail risk

Is this a worthwhile benefit for the fee? Possibly for a very select few, with very specific circumstances. Plus, I doubt the benefit and cost are explained clearly to most investors. For most of them, it is expensive and unlikely to ever be beneficial. The death benefit is only one of the insurance options available with VA products.

Others may include living benefits or stepped up death benefits. Every bit of insurance you buy is likely a losing bet for you and a winning bet for the insurance company. This is a great reason to consider mixing insurance products with investments, and to only insure the things that you can not afford to lose. The answer to this question is very simple. After all, there are high profit margins for financial institutions. All of this is done deceptively, but within the letter of the law.

Solvency return and Solvency exempt return

Incentives are hidden in broad, vague language deep in hundreds of pages of long prospectuses. Variable annuities are appropriate only for a very limited group of investors in very specific circumstances. They are unnecessarily expensive and complex investment vehicles for most people.

However, they are common. This is not because they are bought by educated consumers, but because they are pushed by insurance companies for whom they are highly profitable products. For most people, this article is all you will ever need to know about VAs. Getting out of a bad variable annuity contract is a very complicated and often expensive process. The best medicine in this case is certainly prevention. If you are already in a bad variable investment that you no longer want, I will provide options to get out of the contract and a framework to make the best decision while factoring in complicated factors.

Look for it in an upcoming post, to be published next week. Podcast: Play in new window Download Embed. Subscribe: Android RSS. Our Day Money Challenge will help you get out of debt, save more, and take back control of your life.

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Bonus: You'll also get instant access to my interview of a husband and father who retired at the ripe old age of. What others are saying: "Hi Rob. I'm at Day 26 in your 31 day money challenge podcast. Thank you, thank you, thank you! I've been looking for a comprehensive guide to all-things-money and this has been so informative.

Chris, your article is spot on. For the vast majority of people, a variable annuity is a horrible investment.


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  5. Thanks for the detailed explanation as to why they are a poor investment. Wow, such dissension in the ranks! It was noticed that the average weights in the population are higher than the ideal weights for survival. This led to a formula to calculate the ideal weight used by bariatric surgeons, but it had lost considerable accuracy by , again due to improvements in medical care and in public health.

    From Wikipedia, the free encyclopedia. For the book by Fran Lebowitz, see Metropolitan Life book.

    Variable Annuities vs Fixed Annuities

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