A Warning About Variable Annuities: You Need to Read the Fine Print
“Brokers love variable annuities, but most investors should view them as toxic investments.
Variable annuities are basically mutual funds contained within a highly expensive insurance “wrapper.” They are attractive to brokers because they offer almost unbelievably high commission payouts which the client never sees, but pay through high annual expenses and large “surrender charges” which are imposed if you try to sell the investment. The pretense of these expenses is that they pay for benefits, including the so-called death benefit, which is a seldom used and vastly over-priced form of portfolio protection against market declines. The brokers who sell these investments seldom inform clients that the benefits are virtually never worth the costs.”
Variable annuities end up costing investors in the long run. Brokers can earn commissions that easily run 5% when an investor buys an annuity. Surrender charges can often be as high as 9% when investors need to unlock their money.
But it’s not just the cost of getting in – or out – of an annuity: the yearly costs add up quickly. Just to give you an example: a client who recently hired my firm was holding a MetLife annuity with an annual cost of 5%… and a Prudential annuity with an annual cost of 7%! Of course, those expenses were hidden away in a prospectus that was around 200 pages long. Needless to say, a broker is not going to point that out during a sales pitch. The client was never told of these expenses.
The Big Five Reasons to AVOID Annuities 1. Most variable annuities are very expensive with annual fees ranging from 3.5% to as high as 11%; each year robbing from your investment return! 2. Mediocre and Limited Investment options with high expenses. 3. Big surrender charges that last 5 to 9 years, to get your own money out! 4. The death benefits are of little benefit — rarely used and carry a big price tag too. 5. You pay Higher taxes when you take your money out; taxed at ordinary income rates, not capital gain or dividend rates.
That’s why when it sounds too good to be true, READ the FINE PRINT! Or better yet, call our office for objective investment management and advice.