For obvious reasons, the insurance company is trying to protect themselves from having to pay you too much money during your lifetime. You would more than likely be putting yourself at an advantage if you knew you would live past age 100 with most of these annuity products.
•With most variable annuities, it's a misconception that your beneficiaries get nothing if you die. What they generally get with a typical VA with a living benefits rider is the market value of the contract less any withdrawals which you may have taken. As we mentioned above, certain contracts have riders which will allow the contract holder to obtain income bases which are higher than the contract value. It's important to note that the contract value and the income base are two separate numbers. The contract value is simply the value of the investments which fluctuate in the market and is affected by contract expenses and withdrawals.
•In terms of costs and expenses, the average variable annuity in 2009 had annual expenses of 2.44% including insurance and investment expenses (According to Morningstar Research). The most desirable living benefits including "GMWB" (Guaranteed Minimum Withdrawal Benefit) usually run another .5 to 1%, bringing the total annual costs somewhere between 2.94% - 3.44%. Is that a lot? Yes. It's potentially over $3,000 per year on a $100,000 contract. You're paying for a guaranteed income stream in the future, regardless of how your investments perform.
Like many things in financial planning, there's no right or wrong when it comes to variable annuities. For some clients it will be right for others it won't be. Along those lines, I generally don't recommend that clients put all of their eggs in one basket. An annuity may be good for insuring some portion of your retirement income while the rest of your savings can be invested elsewhere.
As always, please feel free to contact me with questions or comments.
Premier Financial Advisors, Inc
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Guarantees are based on the claims-paying ability of the issuer. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor's unit, when redeemed, may be worth more or less than their original value. Optional riders may involve additional fees.
A rider is a feature designed to achieve a goal, attached to a variable annuity contract for an additional fee.
This graph depicts the advantages of tax-deferred compounding. Assumptions are a $50,000 initial investment with an 8% rate of return over a 30-year time horizon. The assumed tax rate is 28%. This graph is for illustration purposes only. Expenses were not included for this illustration. If they were, the return would be lower.
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.