Variable Annuities: The Investment Product That’s Usually Wrong for Almost Everyone
Variable Annuities: The Investment Product That’s Usually Wrong for Almost Everyone
Let me start with a controversial statement: variable annuities are one of the most oversold and misunderstood investment products in America. They’re complex, expensive, and usually inappropriate for the people who buy them.
If your broker or insurance agent has recommended a variable annuity, you need to understand what you’re really getting into.
What Is a Variable Annuity?
A variable annuity is part investment account, part insurance policy. You put money in, it gets invested in mutual fund-like subaccounts, and the insurance company promises to pay you income later (usually in retirement).
Sounds simple, right? It’s not.
The Fee Problem
Variable annuities are notorious for their high fees. You might pay:
– Management fees (1-2% annually)
– Insurance charges (1-1.5% annually)
– Surrender charges (up to 10% if you withdraw early)
– Individual subaccount fees (0.5-2% annually)
Add it all up, and you could be paying 3-4% in fees every year. That’s a huge drag on your returns.
The Complexity Problem
Variable annuities come with features like:
– Death benefits with complicated formulas
– Living benefits with confusing terms
– Surrender periods that can last 10+ years
– Tax rules that are different from regular investments
Most people who buy them don’t understand what they’re getting.
Who Actually Needs Variable Annuities?
Here’s the truth: very few people actually need variable annuities. They might make sense if you:
– Have maxed out all other tax-advantaged accounts
– Are in a very high tax bracket
– Need the specific insurance features
– Can afford to tie up your money for many years
But for most people, simpler and cheaper alternatives are better.
Better Alternatives
Instead of a variable annuity, consider:
– Low-cost index funds in a taxable account
– Maximizing contributions to 401(k)s and IRAs
– Simple immediate annuities if you need guaranteed income
– A diversified portfolio of stocks and bonds
These alternatives are usually cheaper, more flexible, and easier to understand.
Why Brokers Push Annuities
Variable annuities often pay commissions of 5-7%, compared to 1% or less for mutual funds. This creates a huge incentive for brokers to recommend them, even when they’re not appropriate.
I’ve seen too many cases where retirees were sold annuities they didn’t need, couldn’t afford, or didn’t understand.
Red Flags
Be suspicious if:
– The annuity is being sold as an investment rather than insurance
– You’re told it’s “guaranteed” to outperform other investments
– The salesperson downplays the fees or surrender charges
– You’re pressured to move money from existing retirement accounts
– The benefits seem too good to be true
What to Do If You’ve Been Sold an Inappropriate Annuity
If you believe you were sold a variable annuity that wasn’t suitable for your situation, you might have legal options. Common problems include:
– Selling annuities to elderly investors who don’t understand them
– Recommending annuities inside retirement accounts (where the tax benefits are wasted)
– Failing to disclose high fees and surrender charges
– Misrepresenting the benefits or guarantees
The Bottom Line
Variable annuities are complex, expensive products that are appropriate for very few investors. Don’t let high-pressure sales tactics or promises of guaranteed returns convince you to buy something you don’t need.
If you’ve been harmed by an inappropriate annuity sale, an experienced securities attorney like Bob Pearce can help you explore your options for recovery.
Remember: the best investment is usually the one you can understand and afford. Variable annuities are rarely either.