Variable Annuity Guarantees

[Drifting]

Do variable annuities guarantee the original monetary value of your contract or the number of shares held within the account? I know that variable annuities have fees that reach upwards of 3 to 4% per year. Multiply that times 7 years and that equals 21 to 28 percent. So in other words would those fees be subtracted from your original dollar amount invested if you were to pull everything out after the surrender period expired (and the stock market went sideways or down)?

 

[DHK]

Nope. No principal guarantees with variable annuities... UNLESS there is a kind of rider that guarantees it, or restores the balance after a set period of time.

The only guarantees there typically are on variable annuities are income riders that guarantee that you'll get the original balance paid back to you over a period of years.

You are correct about the fees eroding the original balance over time. That's why you typically should be investing a notch or two above your normal risk tolerance... to help compensate for the additional fees. However, the TIMING of the fees (M&C, portfolio management, riders) come out on a daily basis. They are just like mutual fund expenses... they are just there and they do affect your net return daily. It's not like the fees are being deferred until you withdraw the entire balance at the end of the surrender period.

Also, most variable annuities that choose various riders, can only choose from various "model portfolios" that are pre-approved by the insurer to keep the contract in compliance with the rider.

 

[Norwayguy]

Nope. No principal guarantees with variable annuities... UNLESS there is a kind of rider that guarantees it, or restores the balance after a set period of time.

The only guarantees there typically are on variable annuities are income riders that guarantee that you'll get the original balance paid back to you over a period of years.

You are correct about the fees eroding the original balance over time. That's why you typically should be investing a notch or two above your normal risk tolerance... to help compensate for the additional fees. However, the TIMING of the fees (M&C, portfolio management, riders) come out on a daily basis. They are just like mutual fund expenses... they are just there and they do affect your net return daily. It's not like the fees are being deferred until you withdraw the entire balance at the end of the surrender period.

Also, most variable annuities that choose various riders, can only choose from various "model portfolios" that are pre-approved by the insurer to keep the contract in compliance with the rider.

DHK many VAs do provide a guarantee on the death of the annuitant, but that does not do a lot of good while alive.

 

[sman]

The only guarantees there typically are on variable annuities are income riders that guarantee that you'll get the original balance paid back to you over a period of years.

The majority of income riders on VA's are not just a guarantee of a return of the original balance. They are a guarantee of a percentage of withdrawal of the protected payment base. If a person lives long enough, they will receive much more than the return of their original balance even in a negative return environment.

 

[Newby]

The majority of income riders on VA's are not just a guarantee of a return of the original balance. They are a guarantee of a percentage of withdrawal of the protected payment base. If a person lives long enough, they will receive much more than the return of their original balance even in a negative return environment.

That would be true of any annuity if they live long enough.

 

[sman]

That would be true of any annuity if they live long enough.

I didn't say otherwise. The topic is VA's and the other poster stated the guarantee on VA's only returned the initial deposit. Thus my response.

 

[Stephen]

Do variable annuities guarantee the original monetary value of your contract or the number of shares held within the account? I know that variable annuities have fees that reach upwards of 3 to 4% per year. Multiply that times 7 years and that equals 21 to 28 percent. So in other words would those fees be subtracted from your original dollar amount invested if you were to pull everything out after the surrender period expired (and the stock market went sideways or down)?

Most Va's have 3 separate buckets: The principle account (separate account), the death benefit account , and income account.

The principle account functions similarly to if you owned the investments outright, with a couple of caveats: surrender charges and higher fees. This is the walk away money that you can have if you decide to take your ball and go home, or play somewhere else.

The death benefit account is the amount that the beneficiary receives. A lot of Va's will guarantee the original deposit amount minus any withdrawals. You can add bells and whistles such as annual lock ins or guaranteed x% annual growth of the DB that raise the fees charged against your principle account.

The Income account is the basis for turning your annuity into an income stream.You can add bells and whistles here that also raise the fees charged against your principle.

 

[Charpress]

How many VAs do we see that are not upside down on the principle account?

I have a friend who has made a fortune selling VAs over the past 8 or so years who recently has retreated from his position that they are the greatest thing ever. He maintains that the fees have gotten totally out of hand in the last couple of years so that they have become a hard sell if you are totally honest. That is his position, anyway.

The point I make when I have to go up against a VA sale from a competitor is "would you buy this VA if the withdrawal penalty was for your lifetime?" With many that I see, the income and death benefits are all that are left. Many folks with VAs purchased in, let's say 2007, would have to take a bath to get out for some other product -even after 3 years of a good market.

 

[Stephen]

How many VAs do we see that are not upside down on the principle account?

I have a friend who has made a fortune selling VAs over the past 8 or so years who recently has retreated from his position that they are the greatest thing ever. He maintains that the fees have gotten totally out of hand in the last couple of years so that they have become a hard sell if you are totally honest. That is his position, anyway.

The point I make when I have to go up against a VA sale from a competitor is "would you buy this VA if the withdrawal penalty was for your lifetime?" With many that I see, the income and death benefits are all that are left. Many folks with VAs purchased in, let's say 2007, would have to take a bath to get out for some other product -even after 3 years of a good market.

I agree 100%, Anything less than separate account performance of 10% or so gross of fee's can get a VA upside down quick.

 

[DHK]

The same can be said of any annuity with a GLIB or GLWB riders. These riders are awesome... but once you have those annual "step ups" or "income enhancements"... you are going to be stuck in that annuity in order to keep that benefit.

GLIB or GLWB riders are in essence "unbundled" annuitization options with the illusion of control. Your benefit or income base will almost ALWAYS be higher than your underlying cash values... whether it's a fixed, fixed index, or a variable annuity.

At least you get a lot of benefit for keeping your money with the insurance company.