Is the Party Over for Variable Annuities?
03/15/2012 7:30 am EST
Investors interested in this should be careful to avoid promises that sound empty, because they probably are with these vehicles, writes Stan Haithcock of Stantheannuityman.com.
Most people would agree with the old saying, “The worst part of a party is the cleanup afterwards.” For the variable-annuity industry, the same may be true.
Sales have been skyrocketing for variable annuities. Advisors, brokers, and insurance agents have been eager to sell the product to investors, on the premise of all the upside from the market and none of the downside risk.
They forgot one simple fact: what if it doesn’t work? What if the equity markets don’t perform, and we actually have to pay the income benefits to the policyholders? That is the question now facing insurance companies.
In recent months we have seen John Hancock, Sun Life, and many others exit the variable-annuity business altogether due to the exposure to products issued over the last three to five years. That risk is only growing with each policy issued and the increased volatility in the stock market.
Investors are beginning to catch on. The realization of the discrepancy between what they bought versus what they “believe” they bought is hitting home.
The income rider is just that, an income rider. You only get access to the money promised through an income stream over your lifetime. This is not money that you can access lump sum.
The account balance (also called the “accumulation value”) on any given day is your money. Everything else is on paper, and has strings attached.
Understanding and untangling those strings is the challenge you face if you own one of these variable-annuity contracts. (For those of you considering one, make sure the music you are hearing during the sales process isn’t going to be out of tune when you need the money.)
The saddest part of this “party” is the age of the person purchasing these variable annuities. From my experience and travels across the country, the people purchasing VAs are not 50 to 55 year olds, but rather 70 to 75 year olds.
The actual statistics may very well be younger, but my conversations concerning these products are with individuals well into their retirement years. That is not when you should be considering a variable annuity—they are designed for early years, or at least ten years prior to retirement, at a minimum.
Remember, the theme is tax-deferred growth, and that takes time. Variable annuities are not built as a guaranteed investment for your heirs.
If you are 70 years old and considering a purchase of one of these variable annuities for a ten-year deferral at X% growth, you will be 80 when you start the income stream. What are the odds you will experience the benefit of this rider for a long enough period to make it profitable?
Remember, time is the key ingredient to the deferral, accumulation, and growth of these contracts. Other points of consideration when looking at variable annuities include:
- Fees: They are significantly higher than just about any other product.
- Surrender charges: The time period is longer than some people’s life expectancy when they purchase the product, and the charges are very high.
- Motivation of seller/provider: Commissions and fees are very high. Variable annuities are one of the last products where advisors, brokers, and agents can really “get paid.”
- Riders: They cost money, and are called riders for a reason. Income Riders are for income, not growth. If you want an income rider, buy a fixed annuity.
- Money management: If you don’t manage the risk of the asset, you will have no choice but to convert the rider. This is an equity-based product—nothing more, nothing less! The guarantee is not relative to principle, but income. You must live to receive the benefit. If you die prior to the use of the income benefit, your heirs receive the contract value. You have to “manage the risk” of the asset.
- Death benefit: That is a benefit for your heirs, not you! Death is not a good strategy!
The bottom line is this: did you wake up today and decide you wanted to buy a variable annuity because you did your research and determined it was a product that would meet your needs financially?
Or...did you get a call from your broker, advisor, insurance agent ,or friend that said she/he wanted to show you a product that provides you the upside of the stock market without the risk? If it is the latter, you owe it to yourself to do some research before you step into something that you may regret in the years to come.
In 1952, variable annuities were introduced for pure tax-deferred growth, with hardly any fees. There are still those types of variable annuities available. However, you will never hear about these no-load variable annuities at a “bad chicken dinner seminar” for the very reasons I outlined earlier.
The no-load variable annuities worth considering that I point my clients to for pure tax-deferred growth are: PerfectVariableAnnuity.com, Fidelity, Vanguard, and Jefferson National.
When it comes to the high-cost, high-fee variable annuities that are being “pitched” as the best thing since sliced bread, I think that the late Don Meredith said it best: “Turn out the lights, the party’s over.”
A news reporter recently called me the National “Annuity Consumer Advocate” in the same vein as Ralph Nader and Clark Howard are for other products and services. I hope to continually educate the public on the complex and sometimes ugly world of annuities.