What is a Variable Annuity? And Why Do I Recommend Never Buying One of These from Insurance Companies?

The following blog post will seek to answer the question of what is a variable annuity, and will look at some of the pros and cons of holding a Variable Annuity, as well as the reasons why, for the average investor, buying Variable Annuities is really something that I do not recommend. Variable Annuities were something that came up quite frequently during my time working at a large financial firm, in that we would often times try to sell our clients annuities in order to get huge bonuses and commissions, as well as to allow them to save for their future retirement in a way where they cannot touch the money. The following blog post will explain what a variable annuity is in full, and will walk through why I generally do not recommend them, but why they may be technically considered suitable, for some people. For more information, be sure to subscribe to our blog for additional details and information, and to comment down below with any questions that you may have, and we will get back to you within one business day with a response.

Other popular types of annuities are below:

Term Life Insurance

Whole Life Insurance

Universal Life Insurance

Variable Annuities

What is a Variable Annuity?Equity Indexed Annuities

Fixed Annuity

Variable Annuity Sub Accounts

The Special Memorandum Accounts

Insurance Company Annuities

Wealth Management Firm Annuities

And a host of other similar and related products, read on or subscribe to our blog for additional details and information.

What is a Variable Annuity? The Good and The Bad of Purchasing Annuity Products

Here’s essentially what a Variable Annuity is. You take whatever money you’re comfortable with putting into a long term annuity investment vehicle, usually in the range of 10 to 30% of your net worth, and you put it with your broker in the form of a Variable Annuity. Once all of the documents and paperwork has been processed (and I can tell you from experience that it is a ton of paperwork and that it takes a very long time to put through), we can begin to annuitize the money you gave us.

So here’s the gist of an annuity, you put $300,000 of your $1,000,000.00 liquid net worth into the product, we take your money and grow it at a participation rate of something like 6% interest per year. This is also capped on the downside at 2%, so how it works, is if the market loses 30%, you still make 2%, but if the market makes 20%, you only make 6%. The 2% is your downside protection, but the 6% is your maximum upside gain, known as the “participation rate.” As you put your money in this, your capital grows at a lower risk premium at this stage in your life (at least on paper, while you are really just giving back returns.) From here, the broker earns something like either 8% commission up front, or a 1% annual fee on your money for the duration of the investment, typically 20 years or more.

Why There are Strict Suitability Limits on Selling Variable Annuity Products, and Why This is a Giant Red Flag That They Are Not Necessarily A Great Product

An interesting product indeed, however not without its significant risks and rewards. What really happens when buying a Variable Annuity is that you are essentially tying up your funds, and making yourself feel more secure for the future, when really you are anything but. Sure, it is still worth real money, and if someone gifted me a Variable Annuity tomorrow I definitely would be very happy about that, however if I had $1,000,000.00, I certainly would not put ANY of it into a Variable Annuity. If you are thinking about purchasing any Annuity products that someone tries to sell you, think very clearly about the consequences of doing so, and make sure that you look into blue chip dividend stocks first to provide you with a type of lower fee annuity instead. You can pay something like 18 basis points per year, instead of 1-2% or more, and have full liquidity on your money, and get 3 to 4% per year on your money starting the first quarter you put it in, definitely consider this over any annuity that an insurance salesman might try to sell you.

Final Thoughts on Variable Annuities, and Why You Should Likely Steer Clear of These High Fee, Low Liquidity Investment Vehicles

Hope you enjoyed the blog post, Variable Annuities are a very confusing product, and while they are pitched as a way for retirees and those nearing middle age to save and feel more secure for retirement. What they really do however, is lower your returns and increase your fees over the long term, which is why I really do not recommend these products. I know I didn’t cover these in too much detail as it is literally midnight as I am publishing this blog post currently, but be sure to subscribe to our blog or comment down below with any questions you may have about annuities, and I will do my best to answer promptly. Until next time, cheers!

 

 

*Inflation Hedging.com

Sources:

https://www.bankrate.com/banking/cds/cd-rates/

https://money.cnn.com/data/markets/

 

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