Special Considerations
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Does a Variable Annuity Cost More?
Variable annuities are much more than a simple investment. They are an investment program with an important insurance component. This insurance component does add certain costs. But for many investors, the numerous benefits a variable annuity offers — including insurance protection, guaranteed lifetime income options, unlimited contributions and tax-deferred growth potential — make up for the slightly higher cost.
Unlike mutual funds, variable annuities typically have:
Variable annuities are much more than a simple investment. They are an investment program with an important insurance component. This insurance component does add certain costs. But for many investors, the numerous benefits a variable annuity offers — including insurance protection, guaranteed lifetime income options, unlimited contributions and tax-deferred growth potential — make up for the slightly higher cost.
Unlike mutual funds, variable annuities typically have:
- a mortality and expense risk charge;
- an administration charge; and,
- an annual contract fee (often waived for accounts over a certain value).
Variable annuities are meant to be long-term retirement savings programs. Therefore, they generally have surrender charges for withdrawals made from the contract within the first seven years. It's important to note, however, that a variable annuity's surrender charges apply only after you've taken your annual allowable withdrawal. And if your investment timeline is less than seven years, a variable annuity may not be a suitable investment for you.
Is a Variable Annuity Right for Me?
Because it involves a long-term commitment, it's important that you are comfortable with your decision to invest in an annuity. Following are some things to keep in mind while considering an annuity:
Is a Variable Annuity Right for Me?
Because it involves a long-term commitment, it's important that you are comfortable with your decision to invest in an annuity. Following are some things to keep in mind while considering an annuity:
- Is your investment horizon long-term?
Remember that annuities are long-term retirement savings programs. You should feel reasonably confident that you won't need the money for other expenses before the surrender charge period expires. - Have you made the maximum contribution to your employer-sponsored retirement plan and/or tax-deductible IRA?
While variable annuities offer benefits these other retirement programs do not, it makes good financial sense to contribute first to these other retirement plans. Unlike an annuity, contributions to these other plans may be deducted immediately from your current taxes. - Are you in a high tax bracket?
The higher your tax bracket, the more you'll be able to take full advantage of a variable annuity's tax-deferred growth. - Are the insurance company and investment manager solid?
Your variable annuity is an investment of a lifetime. You should make sure the insurance company has a history of financial strength and the investment company shows a track record of solid long-term performance.
Variable annuities are sold by prospectus, which contains more complete information including risk factors, fees, surrender charges, and other costs that may apply. Please read the prospectus carefully before investing. Variable annuities are long-term investment vehicles designed for retirement purposes. Early withdrawals are subject to surrender charges. Withdrawals are subject to ordinary income tax, and if taken prior to age 59½, a 10% IRS penalty may also apply. Withdrawals have the effect of reducing the death benefit and cash surrender value. Variable annuities are not insured or guaranteed by the FDIC.
Variable annuities have limitations and expense charges. Return and principal value may fluctuate so when withdrawn itmay be worth more or less than the orginal cost.
There is no additional tax deferral benefit for contracts purchased in an IRA or other tax-qualified plan, since these are already afforded tax deferred status. Thus, an annuity should only be purchased in an IRA or qualified plan if the client values some of the other features of the annuity and is willing to incur any additional costs associated with the annuity to receive such benefits.
Variable annuities have limitations and expense charges. Return and principal value may fluctuate so when withdrawn itmay be worth more or less than the orginal cost.
There is no additional tax deferral benefit for contracts purchased in an IRA or other tax-qualified plan, since these are already afforded tax deferred status. Thus, an annuity should only be purchased in an IRA or qualified plan if the client values some of the other features of the annuity and is willing to incur any additional costs associated with the annuity to receive such benefits.
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