Chapter 3-4 Purchasing an Annuity

There are a number of questions that you should ask yourself prior to determining whether to purchase a variable annuity.  The first question that you should ask yourself is if you are utilizing the variable annuity essentially to prepare for retirement or a comparable long-term objective.  Another question that you should ask yourself is whether you are investing in the variable annuity by means of a retirement plan or IRA, which would signify that you are not getting any extra tax-deferral benefits from the variable annuity.  A third question is if you are prepared to take the risk that your account total may go down if the underlying mutual fund investment alternatives do not perform well.  Asking yourself if you comprehend the characteristics of the variable annuity and the expenses and fees that the annuity charges is very important.  Another question that you should ask yourself prior to determining whether to purchase a variable annuity is if you plan on keeping the variable annuity for enough time to avoid any surrender charges.  A seventh question that you should ask yourself is if a variable annuity provides a bonus credit, and will the bonus exceed any higher fees and charges that the annuity may impose.  You should also ask yourself if the characteristics of the variable annuity, which include long-term care insurance, could be bought more inexpensively if they were purchased individually.  A ninth question that you should also ask yourself is if you have received counsel from a tax adviser and taken into consideration all the tax effects of buying an annuity, including the consequence of annuity payments on your tax status when you retire.  Another question that you should ask yourself prior to determining whether to purchase a variable annuity is if you are switching from one annuity to a different one, do the advantages of the switch exceed the expenses, which include any surrender charges you will owe if you take out your money prior to the surrender charge period ending for the new annuity.  Prior to buying a variable annuity, you are obligated to yourself to know as much as you can about how annuities work, the advantages they offer, and the charges you will owe.

If you are thinking about buying a variable annuity, or if you already have one, you should make sure that you comprehend completely how they work.  Here are nine things that you should understand completely prior to purchasing a variable annuity:

1)   There is no guarantee of principal.  Your beginning investment is only guaranteed to your beneficiaries if paid as a death benefit.

2)  Death benefit expenses.  The mortality expense is in your contract and is taken from your account.  These fees could be as much as 1 ¼ percent of your entire account value.

3)  Other fees and expenses.  Every benefit can have an expense connected to it that is taken from your entire account value.  It may be likely that these fees and expenses could be as much as 1 to 2 percent, in addition to the death benefit fees.

4)  Loads and acquisition expenses.  A number of variable annuities have a front end or a back end load that can have an effect on the total performance of your variable annuity.  There can also be administration fees and distribution costs.  Numerous variable annuities impose a fee for administration costs.   These fees can range from .15 percent to .40 percent of your entire account value and these fees are supplementary to additional fees in your contract.

5) State guaranteed protection exemption.  Variable annuities are free from the state guarantee protection act because the invested assets are not at the insurance company; they are in the investment accounts and accordingly are not obligated to this security.  Fixed and immediate annuities are secured by the State Guarantee Fund.

6) Market volatility.  Variable annuity subaccounts can be liable to the volatility of the stock market.

7) Additional compensation to the broker or salesperson.  He/she will continue receiving yearly compensation from your variable annuity.   This compensation is taken from your account total.

8) Death benefits can contain a tax liability.  Any accrued value in your variable annuity in addition to the amount of the deposits is completely taxable as regular income.   This tax is transferred to your beneficiaries.  Be sure that you completely comprehend these variable annuity tax ramifications.

9) Variable annuities include fees and expenses, so it is essential to completely comprehend how they work and how their characteristics can be advantageous for you.

Although variable annuities can be as suitable as any investment under the right conditions, as an investor you should be familiar with their limited characteristics, comprehend that significant taxes and charges may pertain if you withdraw your money too soon, and safeguard yourself from sales strategies that bring about fear.  Always go through the prospectus and if anything is difficult to understand ask for help from the person selling you the variable annuity or a credible advisor.

Questions