How to Choose a Variable Annuity

A variable annuity is much like having a CD and mutual funds under a tax-sheltered umbrella. Variable annuities were first introduced in 1952 and were heavily laden with fees that left the investor with a minimum return. Today’s annuities are far cries from the early ancestor and have become viable tools for investing. In order to choose a variable annuity you need to know what features are best for you.

Difficulty: Moderate

Instructions

Things You'll Need:

• Prospectus of funds
• Company brochures
• Interior fund Returns

1. Understand that you can have a deferred or immediate annuity. Not all annuities allow both deferral and immediate annuitization. If you are promised a specific amount per year that you can never outlive, this may be immediate annuitization. Annuitization means that you are exchanging your right to the principal for a lifetime income.

2. Look at the funds on the interior. Originally, annuities had mutual funds that were created from one fund family. Today the wide selections of the funds inside annuities are products from many different companies. Check to see if they have a good blend of various types of funds when you choose your variable annuity.

3. See if there is a guaranteed death benefit when you choose a variable annuity. Newer products may guarantee that your heirs never get back less than you put in even if the market drops. Some products even guarantee that the death benefit may be, at the minimum, your principle plus a return on your money.

4. Find if there are guarantees on returns. The term guarantee and mutual funds are seldom said in the same phrase. New variable annuities have features that you can add for an annual fee, called riders that guarantee a minimum specific percentage of growth on the principal.

5. Check for withdrawal privileges. Today many variables have allowance for 10 percent per year removal of funds. A good annuity will allow you to remove up to 10 percent if there is no guarantee and between 5 and 8 percent if there is a guarantee. This is not annuitizing but withdrawal so the principal is still yours or your heirs. You can also purchase guarantees on withdrawals.

6. Understand that you may pay higher fees or have higher deferred charges for a bonus up front. Sometimes the growth of the monies and the bonus out weigh the fees. Many times the monies come from lower commissions to the representative. Ask if there is a bonus product and see if it makes more sense to use it when you choose a variable annuity.

7. Find out how long the surrender charges last. A good annuity should be no longer than 6 to 7 years. If there are no withdrawal rights or limited rights and long surrender charges, those over 50 should reconsider.

Tips & Warnings

• Removing monies from any annuity before the age of 59 ½ will result in taxation on the growth and a 10 percent penalty unless specific federal rules are followed.
• When you annuitize a variable annuity, you are guaranteed an income that you can’t outlive, but you also give up all rights to the principal that you invested.