Which brings up a point. The word CON and the regulatory environment "governing" this kind of product.
First, after all reflection, much generated from the intelligent comments in this thread, I agree with you to limit the % of the portfolio you put in a VA. There is valid reason to purchase longevity insurance. VAs are NOT an investment; the are insurance. They provide emotional piece of mind (that has no ROI but is a high value and yes it is an expensive to purchase value).
Second, value, is that for the conservative investor, once you "backstop" the longevity risk, you can afford to place the remaining part of your portfolio in high(er) risk/return investments. That is because your "worst case" is covered. (or thereabouts, the exact %ages of portfolio in each is a function of what you want to leave behind in your estate as a min--grand kids will need to attend university at towering costs too!).
Third, an most interesting to me is the CON aspect. Maybe CON is too big a word, but as I have learned about this product, it is 1000% clear to me that the insurance company, and broker were anything but forthcoming about the expense level of this product. Not only is what you write above true about a) tax at ordinary income levels vs cap gains and b) the no step up basis on the estate when passing, but there is a totally hidden, massively expensive cost, and I am astounded that the regulatory industry has not picked up on this (Personally I think they/FINRA/SEC are again asleep at the switch).
Ask: the broker and insurance company the cost. The reply" 2.7%" (1.3% mortality, 1.4% guaranteed life). OK is every other financial product when the answer is a % when referring to cost, it means a % of the money you put in. But NO, not in the VA! Since the insurance company has an income base (virtual) and an account value (real) they can apply the % cost to the former. They choose the former!! (at least that is what NationsWide does).This effectively doubles the cost of the annuity since you end up paying 2x2.7% (ie., 2.7% on twice what you put in).
Got that?...5.4% of your base in fees. This effectively nullifies the equity return of the VA in all but the most optimistic of market scenarios. (So all you are left with is the longevity insurance aspect of the product).
What irks me, is just how opaque this is. a) the sales folks do not tell you about it, b) the sales folks tell you 2.7% when you has for the "all in cost", and they either do not know or intentionally led you to believe that that is 2.7% of what you put in. But NO, the expense is on twice what you put in cause its assessed on the virtual account (called the income base).
This is exceptionally clever trickery and 1000% misleading to the buyer. I actually wonder if a case can be made for fraudulent. They tell you the cost is 2.7% but it turns out to be 2x2.7% because its assessed on a virtual base that is twice what you put in.
You know as I write this I do wonder--are there any lawyers out there (or others) who might respond to the question of whether the ins company is crossing the legal line (after all there is a misrepresentation when they answer and write 2.7%, leaving the buyer to assume its 2.7% of the amount you are giving them, vs a virtual figure of twice that size, effectively doubling the 2.7% to 5.4%!). At a minimum the regulator agencies should be shouting this out and smashing the insurance companies for this (what ever happened to truth in lending).
You literally need to read 1 sentence in the massive VA contract document to spot this. So maybe the insurance company has not crossed the legal line. But I wonder, if a case cannot be made for deceptive marketing.
At a minimum the regulatory agencies should be ashamed at themselves for not protecting the "average" consumer.
Thoughts?
Allan