For our listeners looking to get a second opinion, as Forbes Magazine suggests, be sure to schedule a no cost financial evaluation by a true Financial Advocacy firm, First Senior Financial Group.
Also, check out the article below that further warns investors on the trouble with variable annuities.
9 Reasons to Avoid Variable Annuities (By Forbes Magazine)
- If you truly want to convert after-tax dollars and gains to tax-deferred gains, you can pour money into a variable annuity but be aware you do NOT receive a tax deduction since annuities are not qualified retirement products.
- It could make sense to annuitize a variable annuity (convert your lump sum to an income stream) if you end up living a substantially longer life than the statistical average.
- Fees typically are very high – at least 2% per year, including “mortality and expenses.” Some variable annuities cost 3-4% per year.
- Investment options typically are limited and often have high underlying expense ratios.
- The insurance component is misleading – it’s not insurance in the common sense of the word. “Insurance” in variable annuities typically guarantees you’ll receive at least the amount of money you initially invested into the annuity if you die (unless you have a rider that increases the coverage – but these are rare since the 2008 meltdown). If you die suddenly, you get the value of your account (if you haven’t yet annuitized) – the “insurance” only has value if your investment plunged dramatically vs. your initial purchase amount.
- Annuities are disadvantageous to inherit if they don’t go to a spouse. If the money formerly was after-tax dollars, the heir receives no step-up in basis on accounts with gains. If you invest the same dollars (after tax) in a stock fund, your heirs benefit from a step-up in basis at the date of death or 9 months later. This is hard to quantify but a step-up in basis is a powerful tool to reduce capital gains taxes.
- Disclosure to individuals – at least the clients I work with – is very poor. I typically see a lot of confusion on the part of clients who bought variable annuities. These are complex instruments with many moving parts that aren’t always adequately explained (or even understand) by the seller. Folks who buy annuities don’t understand the tax ins and outs and often are told variable annuities are “safe” etc.
- Variable annuities typically lack liquidity and can tie consumer money down with prolonged surrender penalty periods.
- Variable annuities convert lower capital gains rates on taxable income (if the annuity is purchased with after-tax dollars) into a higher tax rate levied on ordinary income. This can cost consumers significant tax dollars down the road.