Variable Annuity

An insurance contract that offers investment sub-accounts similar to a mutual fund. Investment returns earned in a variable annuity are not taxed until withdrawn from the annuity. Variable annuities are often sold with living benefits as well as death benefits. They are usually more expensive than other pooled investments and often charge a heavy fee for early withdrawal. Annuities are backed by the strength of the insurance company's ability to pay off the benefits, so the ratings are important.

THE PROs

  • Taxes on investment returns are deferred until withdrawn from the annuity
  • A death benefit is generally included providing beneficiaries some protection against market declines
  • Can have a living benefit providing certain protection against losses and market declines

THE CONs

  • All investment gains are taxed at the ordinary income tax level
  • High total expenses when compared to other investment alternatives like mutual funds
  •  IRS penalty for withdrawal prior to age 59 and ½ of 10% is applied to investment gains
  • May include additional charges or fees for withdrawal prior to the expiration of a stated period of several years

KEY QUESTIONS

1. What are the total fees/expenses (M&E, money management, rider costs, commission or other fees)?

2. What are the surrender charges for early withdrawal?

3. Do I have to annuitize to exercise the guarantee? Please explain annuitization.

4. If I take out more than the stated guaranteed income benefit, how does it affect my living benefit total?

5. Is there a death benefit? How does that work when withdrawing money?

6. Is there a different share class that would reduce my total investment expenses in this annuity?