While there are many guide books and recommendations about the insurance companies that offer the most competitive or best performing variable annuities, there are actually some underlying factors that can help an investor determine the best variable annuities for their own needs.
There are many great benefits to investing in variable annuities, and this is particularly true for investors who have maxed out all of their other tax-deferred investment options. So, how does someone identify those variable annuities that are right for their needs?
A good way to thin out the field is to look at the bad or negative features that may exist in the insurance company’s contracts or practices, and which cost investors unnecessary sums over both the short and long terms.
The first of these is disclosure, it is imperative to work only with an insurance company whose sales staff thoroughly explains all of the terms of the variable annuity contract. For example, did they explain the potential impact of an annuitized account? Did they tell the investor about the potential for loss should their life expectancy not reach the amount of time they estimated? This means that they should ensure their client understands that they may not “break even”, but actually lose large sums should they die earlier than anticipated.
Disclosure should also encompass liquidity. For instance, many variable annuities lock the funds in an untouchable account until a specific period of time has passed and a hefty percentage is retained should the annuitant need to access their money before that time has passed.
The next issues to investigate in order to determine the best variable annuities are charges and fees that may be hidden in the contract. There are some companies that tack on “surrender fees” if the annuitant decides to shift their funds from one company to another. There are also fees in annual contracts that diminish the total profits realized each year of the annuity and can include “administrative”, “mortality” or “expense” charges against the policy. Finally, many insurance sales people work on commissions and this can actually be deducted from the initial investment amount if the vehicle is a “front-end loaded” annuity. There are also fees labeled “12b-1” fees that are an additional commission of up to one percent of the annuity’s value but have never proven beneficial to the performance of a fund.
The way to identify the best variable annuity is to simply rule out those companies that bleed their investors in small and numerous ways. There should be an open and honest discussion about the total costs to the investor, and these should not be punitive or damaging to profit potential.