Your Investments: 5 Things To Know About Variable Annuities

Barbara Marquand | guest writer for GoTalkMoney

The market for variable annuities has undergone a shakeout in the wake of the turbulent economy, and now life insurers are unveiling redesigned products.

A variable annuity is a personal account designed to build retirement savings. Both fixed and variable annuities are sold by life insurance companies. A fixed annuity, like a certificate of deposit, offers a guaranteed rate of return. Variable annuities are riskier than fixed annuities, but they provide potential for greater returns.

Money in a variable annuity is invested in portfolios similar to mutual funds. Most variable annuities also offer a fixed interest rate account as well. Your money grows tax-deferred in annuities, and then when you're ready to retire you can decide how to take out the money. Variable annuities offer a wide range of payout choices, including payments for the rest of your life, like a pension.

You can choose from a wide range of guarantees, although the Wall Street Journal reports that consumers may face fewer investment choices as insurers lower their risks. Also reported by the Wall Street Journal: Companies are redesigning their products to be simpler and easier to understand--a good thing for you as an investor.

Still, variable annuities feature many different facets. They remain complex investments that require careful research. Here are five things to keep in mind before you invest:

1. Weigh the Costs

Fees can make variable annuities more expensive than investments like money market accounts or certificates of deposit, particularly when generous riders, such as a guaranteed minimum income benefit, are added. Financial experts advise against variable annuities as short-term investments--any time frame less than 15 years because it will take at least that long for the tax-deferral benefits to make up for the cost in fees.

2. Max Out Other Retirement Plans First

Annuities have no IRS investment limits, so they might be a good option if you've maxed out annual contributions to your other retirement savings accounts. But financial experts advise against annuities if you're not already investing as much as you can in other options. Why? Those other vehicles, such as IRAs and 401(k)s, provide you the same tax-deferral benefits without the high fees of annuities.

3. Understand Insurance Protection Limits

Like FDIC insurance for savings accounts, there is protection for annuities in case the insurance company fails, but the coverage amounts vary depending on where you live. Coverage is at least $100,000 in most states. You can learn about coverage guarantees in your state at the National Organization of Life & Health Insurance Guaranty Associations.

4. Know the Rules

Annuities are complicated and come with many features and guarantees, so make sure you discuss the various options in depth with your financial advisor. Many people who invest in annuities fail to understand completely how they work. Make sure you separate facts from sales pitches. Remember that the person selling the annuity makes a commission and has a vested interest in you purchasing the annuity.

5. Don't Forget About Early Withdrawal Penalties

Annuities are designed for building retirement nest eggs. Because they allow you to accumulate earnings tax=free until the time you pull money out, you pay a 10% penalty if you withdraw money before age 59 1/2, just as you would if you withdrew money from a certificate of deposit or other investment that's part of a retirement account.


Insured Retirement Institute • What is a Variable Annuity •  http://www.irionline.org/consumers/article/id/167
Leslie Scism • Redesigned Annuities Abound • Wall Street Journal • http://online.wsj.com/article/SB10001424052748704162104574630600739241492.html?mod=googlenews_wsj
Insured Retirement Institute • 2009 Annuity Fact Book •  http://www.irionline.org/pdfs/09AnnuityFactBook/chapter6.pdf
Cameron Huddleston • What to Ask Before Buying an Annuity • Kiplinger • http://kiplinger.com/basics/archives/2002/04/story25.html

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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