I am often asked about variable annuities (VAs). As these products have evolved over the years, investor misunderstanding and confusion seem to have increased proportionally. If you have a variable annuity, or are considering one, here are four things you need to know:

 

1. Variable annuities are security products. By definition, the value of a “security” can go up and down. Money invested in a variable annuity is typically allocated to stocks and bonds through “sub-accounts.” (While there can also be a “fixed” account available within these annuities, I rarely see this option chosen by investors.) I often find that investors think they cannot lose their original investment in a variable annuity. This seems to stem from confusion with fixed annuities (which do protect principal) or, regrettably, from some advisers who do a poor job explaining this product’s complex features.

 

2. A guarantee of lifetime income is not the same as “safety of your principal.” Most VAs offer “lifetime income riders” as well as other optional benefits (additional fees apply). Say you invested $100,000 in a variable annuity, and over a five-year time period the stock market slumped. Your annuity’s value fell to $80,000. As a safety net, an income rider could give you the option to take a set amount annually ($5,000 in this example) as lifetime income – this is not the same as getting your principal back as a lump sum.

 

3. Distribution is fragmented. Not all VAs are available from all financial advisers. Variable annuities are sold by broker-dealer firms under the terms of selling agreements with insurance companies. For recommending these products, stockbrokers and registered representatives earn a portion of the commissions paid to the broker-dealer by the insurance company. If you want to purchase a VA, you’ll want to shop around; features and costs can vary.

 

4. Be very clear about the purpose of the variable annuity. If you are seeking diversified growth opportunities, why limit yourself to a pre-determined collection of investment choices within the typical variable annuity? Consider establishing a brokerage account where you can select from thousands of investments. If principal protection is the real goal, a money market account, certificate of deposit or a fixed annuity may serve you better. And, if income is a priority, you may want to consider a diversified bond portfolio, an immediate annuity or fixed annuity.

 

Unfortunately, I can only scratch the surface here. With VAs, there is a lot of room for misinterpretation and misrepresentation. If you are unsure about your current annuity, or one being offered to you, call me for a free analysis!

 

 

 

 

 

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David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.