Anthony Ricigliano – The Bad and the Ugly on Variable Annuities

If you have been pitched on variable annuities by your broker, financial advisor, or life insurance agent, you’ve already heard everything that is good about them. The sales pitch normally includes benefits such as tax deferral, income for life, and downside protection from market fluctuations. It all sounds well and good until the details on how the annuity is actually going to work are explained.

The Bad:

One of the foundations of a variable annuity pitch is “You’ll have a lifetime stream of money.” This is called annuitizing the policy and once elected, starts paying you money at a regular interval whether it’s monthly, quarterly, etc.  The decision to annuitize is most often irreversible, mean that you can’t elect to take payments for a while and then cash out the rest of your policy. In reality, once you annuitize your policy, you no longer own the money that was in your variable annuity, you only own the privilege of receiving your scheduled payments. The really bad part of this aspect of the plan is that your annuity payments will be structured based on actuarial tables which will determine the amount of the checks coming out of the policy. Annuitize at an early age and your payments will be much lower than if you start taking payments at a later date. If the actuarial number determines a 5 percent payout on the amount of the policy, you’ll be receiving your own money back for the first twenty years of the annuitization. It’s only after that time that you’ll start receiving funds beyond the value of your policy.

Tax deferral comes with a price. If you want access to your funds prior to age 59 and a half, you’ll pay taxes and penalties of 10% of the amount withdrawn. At the higher tax brackets these costs could cut your withdrawal in half.

If you’re a buy and hold investor, you’ll lose out on capital gains treatment because gains are taxed as ordinary income when they’re withdrawn from a variable annuity.

The Ugly (It Gets Worse)

If the Anthony Ricigliano Bad and Ugly stuff isn’t enough, it gets worse with surrender charges. Once you made your initial investment, you’ll be locked for eight to ten years of surrender charges if you decide that you either need your money or that your variable annuity isn’t such a great investment. Combine surrender charges with early withdrawal penalties and taxes and you could lose more than half of your money.

You’ll also see a big chunk of change go toward the sales commission. Commissions can top 5% and range up to 8% for some annuities.

All the bells and whistles that provide benefits in an annuity come with fees, expenses and other charges. These come directly out of any returns that may be earned in the policy. Over the years these charges can add up to a significant amount of money.

Insurance companies love selling Anthony Ricigliano Variable Annuities because they bring in loads of cash in the form of fees and expenses while locking investors in for years. The next time you’re hearing a presentation which highlights the good, remember the bad and ugly aspects of these annuities as well.