What
is a Variable Annuity?
"What IS a Flexible Premium Variable Annuity, it's benefits and potential performance?"
A variable annuity is a personal retirement program that can provide a solid foundation for your
financial future. Variable annuities, which are offered by life insurance companies may seem
complicated (due to their extensive diversity and options) but in fact are very simple and easy to
use. Variable annuities can be used in any or all of the following illustrations:
* non-qualified (money of any kind, from anywhere, of almost any amount)
* Traditional IRA's (transfers & rollovers)
* ROTH IRA's (new or rollovers)
* SEP and SIMPLE IRA's for the self-employed (new or rollovers)
* 401-k rollovers
* 403(b) TSA's (Tax Sheltered Annuity) transfers
* 457 plan rollovers (city, state and some government retirement plans)
A) Investments / Premiums:
For most variable annuities you can choose from a full range of professionally-managed investment
portfolios, in some variable annuities, as many as 100 different funds. Your investment performance
will fluctuate, reflecting the performance of the investment portfolios you choose (or I choose for you-
if you elect to have me manage it for you). Your investments are subject to market risks and
fluctuations just like any other securities related investment and their performance. You could lose
all or part of your investment, just like other mutual funds or stock related investment programs.
B) Tax and Money Management
Advantages:
A variable annuity investment provides tax-deferred growth. Your earnings will grow tax-deferred
until withdrawn. Upon withdrawal, your investment earnings will be subject to current income tax
and, if withdrawn prior to age 59 1/2, an early withdrawal penalty of 10% may apply. (unless a
special IRS rule is used, called a 72t or 72q)
Transfers among investment options inside the annuity are not taxed upon movement from one to
another, nor are their any charges for moving from one fund to another, in most cases ("some"
companies may charge a fee after a number of changes). This means tax-free and no-fee transfers
from one fund to another. Your money may be freely moved from one fund to another to take
full advantage of market trends and economic changes. This important feature offers the annuity
owner or their financial advisor the opportunity to "actively manage" these investments to best
realize potential market gains as well as prevent major down side loses, if properly managed.
A variable annuity helps avoid current income taxes on your investments because all earnings
grow tax-deferred (even if they aren't an IRA). Therefore, more money may accumulate faster,
due to the compounding effects due to tax-deferral, in a tax-deferred annuity. Remember, you
only pay taxes "on your earnings" (not on your original principal-unless it's an IRA). You only pay
taxes when you take the money out. Taxes are based on ordinary income tax rates rather than
on capital gains rates. This also applies to an IRA annuity as well. In other words, you won't get
a "Form 1099" at the end of the year on a variable annuity investment plan.
NOTE: annuities are NOT used for their tax-deferred aspect when combined with an IRA.
There are many other reasons (as described here) for using an annuity, since an IRA already
offers tax-deferred growth without the use of an annuity.
C) Protection:
A variable annuity is DISTINCTIVE because it offers downside protection for your beneficiaries.
All annuities I offer are provided by life insurance companies, as most all are, and have
Guaranteed* death benefits to protect your beneficiaries. (Naturally this is based on the claims
paying abilities of the company you have chosen for your annuity.)
What does this really mean?
At the death of an annuity owner, the beneficiary may get to choose from several death benefits,
and can take the highest one (this can vary from annuity to annuity):
1) the original amount invested (meaning premium paid in-adjusted for any withdrawals)
2) the annuity contract "then current value" (meaning it may have grown)
3) or the cash surrender value (sometimes this could be less than one of the above if certain
charges or fees hadn't been deducted as yet)
4) SOME annuities offer several "optional" annual step-up death benefits as well. These options do
have some added cost. Some of the more popular ones are, an annual growth of 5% to 7 % per
year for the death benefit. This has nothing to do with the actual performance inside the annuity, this
relates strictly to the Guaranteed* Death Benefit. This is a very popular option that can be added for
an additional premium.
Most tax-deferred variable annuities today are a combination of both a "variable" (meaning it has
securities based investment sub-accounts) and also a fixed annuity as well. Meaning they offer a
variety of fixed rate accounts inside the annuity, such as: 1 year, 3 year, 5 year, 7 year and 10
year fixed rate accounts. Plus a money market account.
D) Eligibility:
Most companies issue variable annuities to people from age -0- to as high as age 90 (but not all).
MINIMUM Amounts: most annuities have a required MINIMUM to start them. This varies
from annuity to annuity and from company to company. Some can be started for as little as $1,000
(for IRA annuities) others require higher minimum starting amounts often around $10,000 or more.
It’s my job to help you select the one that best fits your specific needs and desires.
COSTS: What does a variable annuity cost? ALL variable annuities have at least two costs:
a) No UP FRONT going-in costs! That's right, there are no initial costs to put money into
an annuity. 100% of your money goes into an annuity and goes to work immediately. Nothing
is taken out for commissions, costs or fees of any kind, initially.
b) Mortality and Expense charges- what this means is, the cost to provide the Guaranteed*
Death Benefit to your beneficiaries. This fee averages about 1.00% to 1.60%.
c) Administrative Charges- this is the amount charged to actually administer and maintain your
annuity for you. The on-line services, the toll free 800 # you can call anytime to check on your
investments and actually talk with a "live human on the other end"! All their advertising and
printing costs and etc. In other words, all the costs necessary to provide and maintain this fine
product and service to you. Including all the reports you receive on your account and it's
progress throughout the years. This fee often averages somewhere around 0.10% to 0.15%.
d) other fees- some annuity companies charge a yearly administrative fee. This is often
about $30.00 but most companies waive this fee if an annuity has a minimum balance in it,
such as $50,000 or more. This varies from one company to another. (Always check the
prospectus for all the costs associated with any securities related investment. They will vary
from one to another.)
e) investment management/sub-account fees are also a part of the cost since the sub-accounts
are managed by third party account managers and companies. These fees are similar to those charged
by most fund companies for each sub-account fund. This is not a separate charge, it is built in and
an inherent part of each fund and it’s management.
In most cases, the annual cost for most variable annuities are about 1.40% to as high as 2.00% in
some cases, depending on what options you might choose to add to your specific annuity. (See below)
SOME (but not all) variable annuities may provide additional "optional" features (yes this means they
cost extra), such as: NOTE: NOT all options are available to all ages or from all companies.
1) Earnings Multiplier- This is a relatively NEW option only offered by some companies. It is
basically added life insurance that is added to your annuity contract to somewhat match your earnings
growth. The objective being, to provide additional cash at death, enough to pay the income taxes on
the gains. This feature (in essence) provides additional cash to your beneficiaries to pay taxes on the
growth. It is available to almost any annuity owner. There are no health questions, nor health issues,
to be concerned about. It’s possible you may qualify for this added coverage (with some possible
age restrictions).
2) Guaranteed* Living Benefit- This option Guarantees* the annuity owner the return of their
original amount invested, regardless of market results. In other words, with this option, you can freely
invest as aggressively as you'd like with the assurance that over a stated time period (usually 10 years
or more) you are Guaranteed* to get at least your original investment back- no matter how much
your investments might lose during that 10 year time frame. (Again, this is based on the claims paying
abilities of the life insurance company you have chosen for your annuity.) With some annuities, in order
to get this guarantee, you may have to "annuitize" your annuity in order to receive this assurance/guarantee.
Read the prospectus, make sure you get what you expect.
E) Retirement Options:
When it's time to start receiving income from your annuity contract, you can choose one of several
payout options, including some options you cannot outlive.
You may elect to simply do nothing and continue to let your money grow tax-deferred, or you might
choose to take what is called "systematic withdrawals" which can be changed from time to time to
provide the desired income you might want or need. Taxes are paid at ordinary income tax rates.
You may also elect to "annuitize" you contract, which means, you in effect trade your contract for a
"Guaranteed* Lifetime of income you can't outlive".
NOTE: this is often used to remove an annuity from someone's taxable estate, since they (in effect)
no longer own that lump sum of money, yet are still entitled to the stream of income for life. Annuitization
is commonly used by older age person's that need an income but fear their assets may disqualify them
for certain state long-term care benefits. Once an annuity is "annuitized" you often can't change this.
(Again this varies from one company to another-read the prospectus for your specific annuity.)
F) LIQUIDITY:
As indicated previously, most annuities allow an annual withdrawal of 10% without any related
withdrawal costs or fees. Keep in mind this is for withdrawals after the age of 59 1/2. If withdrawals
are made prior to age 59 1/2, an early withdrawal penalty of 10% may apply. (unless a special IRS
rule is used, called a 72t for IRA’s or 72q for non-IRA annuities)
Some offer 10% per year withdrawals, but if not taken, can be accumulated over time and then as
much as 50% can be withdrawn in any given year. Some annuities may have no withdrawal restrictions,
such as a 100% liquid annuity. (NOTE: the 100% liquid annuities often have higher internal operating
costs.) It all depends upon the specific annuity you might select. There are MANY to choose from
and each is used for different reasons and specific needs. I help my clients select the one that best
fits their specific needs and desires.
Most variable annuities offered provide lifetime income options to protect you against outliving your
money. Meaning at retirement time (or later) you will have several guaranteed income options
available to you, if you want to exercise them. This is most often called "annuitization".
If you don't understand what this fully means, contact me for a better explanation of this option.
Surrender Charges: Withdrawals may be subject to "surrender charges" if a withdrawal exceeds
the withdrawal limitations of an annuity contract. This means that if you decide to withdraw all your
money, all at one time, or an amount that exceeds the limits of the contract, there may be "surrender
charges". This applies primarily in the early years of an annuity contract. Most annuity contracts
are for a specified number of years, varying from: NONE (zero), to 3, 4, 5, 6, 7, 8, 9, 10 and 12
year contracts. Different annuities may have different lengths and different percentage charges that
can change from year to year. Therefore, if withdrawals exceed the withdrawal limits of the contract
during the contract timeframe "surrender charges" may apply. Again, check the prospectus to make
sure you understand what and how much these charges might be for your specific contract.
Naturally, after the contract period ends, NO "surrender charge" will apply on ANY withdrawals,
lump sum or otherwise. When the contract ends, people often leave their money in the annuity,
allowing it to continue to be invested and grow tax-deferred and simply take withdrawals from
it as needed. (Unless it is an IRA annuity, which will be discussed in more detail below.)
MANY annuities I use offer a BONUS, paid up-front when your money first goes into the plan.
Why do I use this type of plan? Simple, two reasons! One, I know that MANY people have their
money in investments that if withdrawn before it matures, there might be a penalty. This added BONUS
(often ranging from 4-6%) is often enough to offset or compensate for those extra fees. The
Second reason, I want your business! Given the recent market considtions, it has been a blessing to
many who have had major loses in their 401k, 403b, TSA and other retirement plans. Plus, it's my
way of saying thanks!
If you think about it, then it's easy to understand WHY the annuities companies have the "CDSC"-
"contingent deferred sales charges". If they didn't, a person might put their money into an annuity,
collect their BONUS, and then withdraw all their money, keeping the BONUS. Obviously that
wouldn't work! Bonuses can be good, but keep in mind that in order to get them, some fees
may be slightly higher and it normally requires you to keep your money in the annuity for a longer
time (usually one year longer than a contract that does not offer the bonus) to justify them giving
it to you.
OTHER FEATURES: Many (but not all) variable annuities may offer other features (usually at
NO additional cost), such as:
Automatic Portfolio Rebalancing:
Which means you can pre-select a certain investing strategy and the contract will maintain a
desired percentage in each portfolio you select. It is periodically readjusted automatically to
maintain your pre-selected portfolio mix.
Dollar-Cost-Averaging:
This feature can help you take advantage of market price fluctuations. DCA allows you to
make automatic monthly investments into a pre-selected portfolio of investments. DCA can
help you take advantage of market down cycles because you buy more units (or shares)
when prices are low and fewer units (or shares) when prices are higher. As a result, your
average cost per unit (share) is less. Plus, DCA helps reduce the fear of buying at the wrong
time. Dollar-Cost Averaging does not assure a profit or protect you from losses in a
declining market. It merely attempts to help lower your overall unit cost per share. (some
restrictions may apply to certain annuity contracts). NOTE that Dollar-Cost Averaging
often involves continuous investments into securities regardless of fluctuating prices, therefore,
the investor should consider his or her ability to continue purchases through periods of low
price levels as well.
Nursing Home/Terminal Illness Waiver:
"Surrender charges" may be waived under certain medical circumstances. Such as, an annuity
owner who might need to go into a long-term care facility or be hospitalized for extended
periods. In such cases, even if the annuity is still in the early years of the contract time period,
"surrender charges" will in most cases be waived so the annuity owner can have full access
to all their money if needed, without any additional "surrender charges" being paid. This
feature is not always available in all states, check your specific annuity contract or prospectus
to make sure, or check with the issuing annuity company.
Variable Annuities are one of the most sophisticated, and in some cases, the most misunderstood
investment vehicle available today. Yet they offer features, benefits and diversification that no
other single investment plan can offer. Yes, they may seem complicated but in fact are very
simple and easy to use. They offer a wide variety of features and benefits and can be used in
a wide variety of ways. For this reason they have become one of the primary investment vehicles
for many people today.
IRA Variable Annuities:
YES, certainly, variable annuities can also be used for IRA type qualified money as well. i.e.
401k rollovers, 403b’s, TSA’s and more. NOTE: annuities are NOT used for their tax-deferred
growth when combined with an IRA. There are many other reasons (as described here) for
using an annuity, since an IRA already offers tax-deferred growth without the use of an annuity.
Variable annuities are very popular programs to rollover old 401k's or IRA's. As you can see
they offer tremendous diversification and many great features. Variable annuities are commonly
used by people who want to rollover their 401k's or 403(b)'s or 457plan money. They are very
popular for setting-up on a 72(t) for early IRA withdrawals without having to pay the IRS's additional
"early withdrawal penalty" of 10% for those who want to withdraw money prior to their age of 59 1/2.
Annuities have some similarities to many other retirement plans, in that they have the same
age restriction of age 59 1/2 or earlier for withdrawals. Normally you can't withdraw money from
either plan prior to age 59 1/2 without paying the IRS a 10% penalty for early withdrawals, unless
you use the 72(t) program mentioned previously (for IRA's) and a 72(q) program for non-IRA
variable annuities. They both work the same way to eliminate the additional 10% IRS penalty for
early withdrawals prior to age 59 1/2.
Annuities may not be for everyone but they are often used by people over the age of 70 1/2 who
are required to take their "required minimum distributions" from their IRA's. The annuity company
can monitor and adjust your payouts to make sure you are withdrawing the proper amount each
year, so you don't have to pay the stiff IRS 50% penalty on any amount that should have been
withdrawn.
NON-IRA money:
Variable annuities might be an appropriate plan to move accumulated mutual funds or CD money
into, so you can defer paying taxes on your performance gains and growth. Annuities can delay the
tax bill on your growth by taking advantage of the tax-deferred growth of annuities! Remember,
you only pay taxes on your gains when you actually take the money out of an annuity, not until then.
Money is taxed at ordinary income rates rather than the lower capital gains rate.
Variable annuities could a good place to put large sums of money received from an inheritance
or the sale of another asset. They are great for moving large sums of money into all at once.
People have used annuities for many-many years to accumulate wealth for retirement because
of the TAX-DEFERRED growth, flexibility, investment options and almost no limits on how
much they can put into an annuity all at once. Of course variable annuities are also an ideal
place to simply accumulate money (on a regular Systematic basis). Variable annuities are a
great way to save additional funds for retirement and take advantage of tax-deferred growth
while you're doing it. This is often the investment vehicle of choice for those wanting to invest
more than their 401k will allow annually. $12,000 a year for those below the age of 50 and
$14,000 a year for those over age 50. (for the year of 2003)
BENEFICIARY Choices:
(Not all) but some variable annuity companies now offer what is called a "restricted beneficiary"
form. This allows the annuity owner to break up their annuity and provide for it to be paid out
at their death to their beneficiaries in a wide range of methods and ways. It's what some people
refer to as a "poor mans trust". This is a tremendous feature (often at no cost) that is certainly
well worth looking into and can be very effectively utilized by MOST annuity owners.
IN SUMMARY:
I don’t know of any other investment program that offers the flexibility and diverse options that
a modern variable annuity can offer. Of course they may not be for everyone but they are certainly
worth considering.
I've tried my best to cover all possible questions that someone might have regarding variable
annuities, but just in case I missed something, feel free to ask! Naturally, I'd love to help you
with yours! E-mail me and I will provide you an illustration or example that Got a Question?
* NOTE: All Guarantees are based on the financial strength and claims paying abilities of the
life insurance company chosen for your annuity. That is why I only offer some of the finest, highest
rated and most secure companies available in the world. Feel free to contact me for more information
and the names of life insurance companies referred to in this and other articles on my web site.
NOTE: Investment return and principal value will fluctuate, and shares, when redeemed, may
be worth more or less than their original cost. Past performance is no guarantee of future results.
Dollar Cost Averaging does not assure a profit nor does it protect against loss in declining markets.
The above reference is NOT an offer to sell a product. However, if you’d like further details
on anything mentioned here, please contact me for specifics and all the details, including a
Prospectus and illustration will be provided to you.
Using
to provide an income you can't outlive.
Guaranteed for LIFE!
For more info on FIXED ANNUITIES GO HERE
What is a 72(t)? (for early IRA distributions prior to age 59 1/2) GO HERE
For info on using FIXED Annuities for RMD "required minimum distributions" GO HERE
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