What is an Annuity?

An Annuity is a contract between an investor and an insurance company under which a lump-sum payment or series of payments offer tax-deferred growth of earnings.

Variable Annuities have the compelling benefit of tax-deferred growth combined with the potential growth of equity investing. But, over the years we have stated that the number one concern with the product is fees. The average Variable Annuity has a mortality and expense fee, an administrative fee, a  fund asset management fee, and a surrender charge. These added up over the year or years the contract is owned take away some of the primary benefits of owning the contract.

But, there have been improvements to Variable Annuities. Insurance companies have developed what amounts to a ’no load’ contract. These companies now charge a flat fee per year to own the Variable Annuity, in addition to the asset management fee from the fund companies. So, now you can have diversified money management in a Variable Annuity without all the fees.

As with any investment vehicle there are pros and cons.  The analysis is pretty simple and the answers relative to what you are attempting to accomplish will determine the outcome for each individual.

What is good about a Variable Annuity?

• Sub-accounts with multiple investment choices to diversify your money.
• Tax-deferred growth of assets allowing compound growth to work.
• Potential income for the remainder of your life.
• Asset protection – some states shelter the asset from creditors (check with      your local attorney).
• 1035 tax-free exchange between products – no tax trigger to transfer to a better contract.
• Named beneficiaries – avoid the probate process.

What are potential drawbacks of a Variable Annuity?

• 59 1/2 age rule -withdrawals prior may be subject to a 10% penalty (check with your accountant).
• Tax planning for income distribution. The distributions are 100% taxable upon withdrawal as income (no capital gains tax) .
• Your original contribution is not taxed under non-qualified plans.
• Health of the issuing insurance company.
• The assets in a Variable Annuity are in segregated accounts, but still painful in a bankruptcy.
• Tax liability to your heirs (lump sum distribution upon death of the annuitant).

What is bad about a Variable Annuity?

• Surrender charges (find one which has no exit charges, ever).
• Commission on contract (find one without commission, they exist).
• Annual fees, contract fees, administrative fees (find the flat fee version, they exist).
• Percentage of asset fees, i.e. mortality & expense fees (find the flat fee version, they exist).
• Expenses can negate the tax-deferred benefits. (find lowest fee and compare).

If you need help evaluating your situation using an independent third party, we will help determine what Variable Annuity works for you. If you already own an annuity, but the fees are too high, as described above, we can help you find options where the fees are flat and fixed per year. Never settle when it comes to an investment vehicle. It either fulfills your goals and objectives, or you need to find one that does. After all, it is your money! Feel free to contact us at 800-369-5759 if you have any questions, or to make a phone or in office consultation with Jim.