Are variable annuities as bad as people say?

[FloridaJim57]

People have been trying to sell me them for years. I distinctly remeber some very respected financial wise man saying that if you are thinking of buying a variable with say $200, 000 it is better to buy a simple immediate annuity for $100,000 and put the other $100,000 in a good index fund such as the SP500. In the long run you will do much better off. Opinions? Experiences?

 

[Lewis Clark]

My closest friend used to work for an insurance company that sold many annuity products. He warned me to stay away from variable annuities because they have high levels of fees relative to other annuity products.

 

[Finance Dave]

I have never purchased one, but my rule of thumb is that I don't invest in things I don't understand...and I've tried to read and understand those things before and they are way too complicated.

But I also have heard from many people that the fees are very high...the person who makes the most money on them is the person selling them.

I think it's fair at a minimum to ask the broker how much commission they will make on the sale. Of course you don't have to believe them, but it might just expose some key info.

 

[aja8888]

Years ago, one of my coworkers came in with a prospectus for a VA from a major financial company. We scanned the 70 pages of fine print (LOL) and created a pdf file which we searched for words like "fee", "cost", "insurance cost", etc.

Bottom line was about 4% in hidden costs and fees annually.

 

[Aerides]

I don't know if they are AS bad as everyone thinks, but I do know some things:

- They are most likely a good idea for far fewer people than they are pitched too
- Anything that has to be "sold" and is complicated is a bad idea for most people

 

[OldShooter]

I got a PDF of a VA prospectus and keyword scanned for words like "fee." Amazing exercise.There were fees to put money in, fees to take money out, annual fees, and miscellaneous fees. Also, the growth was based on the price growth of the S&P, not the total return. The insurance company was basically keeping the dividends for themselves.

The PDF was 208 pages. No way a salesperson or a buyer could possibly understand it. I have an ironclad rule to not buy anything I don't understand and I recommend that policy to students in my Adult-Ed classes. I tell them that with that rule they may miss a prince once in a while but they will avoid kissing a lot of smelly and expensive frogs.

I also tell them this:

Rule of Thumb: The more complicated an investment product is, the more likely it is that it was designed to make money for the seller, not to make money for you.​

 

[audreyh1]

Yeah, that S&P500 price growth and keep the dividends is a pretty rude trick. Same trick is used by indexed “CDs”. A lot of people don’t realize that the index pays dividends.

 

[OldShooter]

Yeah, that price growth and keep the dividends is a pretty rude trick.

As far as I can tell, though I have not studied extensively, they are all like that.

There was a thread a while back where IIRC, @pb4uski said it was not uncommon for a salesperson to take home a $100K commission on one of these things.

 

[audreyh1]

As far as I can tell, though I have not studied extensively, they are all like that.

Yes, pretty common slight of hand from what I’ve read.

 

[Stormy Kromer]

I bought one with my life savings in 1997. From my experience I would have been better off putting it under my mattress.

They should be illegal.

 

[rayvt]

Years ago, one of my coworkers came in with a prospectus for a VA from a major financial company. We scanned the 70 pages of fine print (LOL) and created a pdf file which we searched for words like "fee", "cost", "insurance cost", etc.

Bottom line was about 4% in hidden costs and fees annually.

Wow, that was a good deal. I manually scanned a 60+ page annuity document and came up with 7% fees.

 

[qwerty3656]

This guy says use annuities rather than bonds:

https://youtu.be/AYgTBnmAG-0?si=jIMngL54q0PoUUg1

 

[audreyh1]

Is he peddling variable annuities?

 

[qwerty3656]

Is he peddling variable annuities?

He calls them "Fixed index annuities", but they are what my understanding of variable annuities (maybe i'm wrong)

 

[audreyh1]

Another naming obfuscation? Oh they’re fixed, just fixed index.

 

[aja8888]

Wow, that was a good deal. I manually scanned a 60+ page annuity document and came up with 7% fees.

Yeah, unless we missed some fees!

 

[ShokWaveRider]

Variable Annuities are one of the highest fee insurance products you can buy. I am in favour of MYGAs and SPIAs for those who want them. I use MYGAs as CD equivalents and am considering a SPIA for some of my IRA funds as at the end of the day "for us" they provide a better return than CDs in the long term along with ga guaranteed income stream for their duration. One can choose the duration 10, 15, 20, 25 years certain, and life are examples.

 

[qwerty3656]

Variable Annuities are one of the highest fee insurance products you can buy. I am in favour of MYGAs and SPIAs for those who want them. I use MYGAs as CD equivalents and am considering a SPIA for some of my IRA funds as at the end of the day "for us" they provide a better return than CDs in the long term along with ga guaranteed income stream for their duration. One can choose the duration 10, 15, 20, 25 years certain, and life are examples.

Where do you find MYGAs and SPIAs w/o fees?

 

[ShokWaveRider]

Where do you find MYGAs and SPIAs w/o fees?

From anyone who sells them. Commission is paid directly to the broker by the insurance company.

https://www.immediateannuities.com/deferred-annuities/
https://www.blueprintincome.com/
https://www.annuity.org/annuities/types/fixed/myga/
https://www.stantheannuityman.com/

 

[rayvt]

He calls them "Fixed index annuities", but they are what my understanding of variable annuities (maybe i'm wrong)

They are fixed alright. Same way as a pet dog gets fixed.

 

[frayne]

They are excellent products for the people who sell them.

 

[sengsational]

Not every variable annuity has horrific expenses and is horrifically complicated.

For instance, some are just recognized mutual funds wrapped as an insurance product. There's the underlying mutual fund fee (small for index funds) and a small additional fee for the insurance company administration. You own shares that go up and down with the mutual fund. So you could have the S&P 500, for instance. Your VA would track the index. You don't have to ever turn it into an annuity (equal payment stream) if you don't want to. Instead, you do a "partial surrender" which is just insurance speak for "sell" The "bad news" is that you take out gains first, so you pay tax on 100% of what you take out until you finally get down to your basis. No capital gains favorable tax treatment. The good news is that it's considered a retirement account, so it's got more protections against seizure than an after tax account, and is probably still treated more favorably in the student aid calculations.

 

[Closet_Gamer]

My Mom and Dad got sold a VA a long time ago. When I started to help my mom with her finances I dug into it. It was very difficult to sort through, but by my estimate she was paying 5%+ in annual fees once you included the very high exp ratios in the underlying, actively managed funds. I suspect, but can't prove, that there were trading commissions inside of the annuity because the guy "managing" the money had her investments spread over 22 different mutual funds.

There was also the usual surrender period (though she had already gotten through that).

The "upside" of all this, and the feature that originally got them into the product, was that they "could never lose money" ... which meant they were guaranteed to get their original principle back after the surrender period. Gee, thanks. A CD would have done that.

I pried her from his clutches but it was ugly.

I would simply run away from a VA product.

 

[OldShooter]

Not every variable annuity has horrific expenses and is horrifically complicated.

For instance, some are just recognized mutual funds wrapped as an insurance product. There's the underlying mutual fund fee (small for index funds) and a small additional fee for the insurance company administration. You own shares that go up and down with the mutual fund. So you could have the S&P 500, for instance. Your VA would track the index. You don't have to ever turn it into an annuity (equal payment stream) if you don't want to. Instead, you do a "partial surrender" which is just insurance speak for "sell" The "bad news" is that you take out gains first, so you pay tax on 100% of what you take out until you finally get down to your basis. No capital gains favorable tax treatment. The good news is that it's considered a retirement account, so it's got more protections against seizure than an after tax account, and is probably still treated more favorably in the student aid calculations.

Sounds to me like its primary purpose is to be a product that can be sold with only an insurance license. No benefit to the purchaser that I can see if I understand your explanation correctly.

 

[sengsational]

No benefit to the purchaser except the few benefits I mentioned. I'm not sure what all the benefits are in being able to reclassify an unlimited amount of assets as "retirement assets", but there are the few I mentioned. Not that those make a difference to many people, but might make a difference in some situations. That being said, the typical high pressure sale, high commission VA's are certainly to be avoided, and usually that's what people are talking about when the topic of VA's come up.