May 11, 2020Individual Investment Management

Variable Annuities are Rarely Attractive. 
A product often sold but rarely sought! 
 
Avoiding the annuity hustle. 

As markets correct and the world becomes more uncertain, there is one thing you CAN be sure of during times like these - aggressive annuity salespeople. Why you ask?  One of the most seductive sales pitches in all of personal finance of course!  When markets are choppy this becomes a very attractive proposition.....but there are a few problems. 

3x or 4x fees on your  account: 
When you own investments, there is usually only one set of fees that comes from owning that product.  Example:  Variable annuities will often layer on 3x or 4x these fees.  Fees for product, fees for the selling agent, fees for guarantees, fees for management....it's a wonder they don't charge for phone calls. 
 
Enjoy low rates?  You're stuck with them: 
An annuity is simply a promise from the insurance company - deposit your money, and we will promise you a fixed payment for life.  In order to make said promise, the company models an implied interest rate to your account based on mortality and expense charges.  If rates improve?  Your payment stays the same - not a great deal for the owner but great for the company!   
 
You don't  get to keep dividends: 
Depending on timeframe, dividends from an investment can comprise 20-40% of total return.  Your variable annuity probably won't let you keep these - that goes to the company of course!  If you want to keep those, maybe it's an option - for an extra cost surely! 
 
Lengthy lock-up periods: 
One of the seductive features of an annuity is guarantees - but those come at huge cost.  It is quite common for annuities to have 5 or even 7-year lockups where you are unable to access monies or limited in your ability to access them.  If you violate this, you will be charged enormous fees for the "privilege" of having access to your own money early.  These fees can range from 1-5% of the total depending on when you withdraw early.  401(k)s, Roth IRAs, high cash value whole life plans, or even IRAs have much more attractive access to your money should you need it.  
 
Huge agent commissions: 
Did you know the agent selling your annuity can often get 5-10% of the total you invested as a commission for selling an annuity?  Guess who paid it.....yep, you did.  This is also why annuity owners are subject to lengthy holding periods.  The insurance company needs time to recoup the costs of it. 
 
Need to borrow against it?  Forget it: 
If you need to keep some money liquid, you often have much better borrowing terms if you borrow from a whole life insurance plan rather than an annuity.  If you like having the security of an insurance product, it may be wise to look into the benefits of a high-cash-value whole life plan rather than an annuity.