Variable Annuity Advantages

Are there any Variable Annuity Benefits? Of course, otherwise, variable annuities would not exist. But... Do your homework. These annuity products fit the needs and desires of certain investors, but they also have a variety of drawbacks to watch out for.

Variable Annuities have positive features as well as negative features, which means they are the right choice for some investors and not for others. Let's keep it simple and list the most apparent positive and negative features of variable annuities to see how they relate to each other and whether they suit your specific needs.

Positives:

Unlimited Contribution: This point is almost never discussed. Unlike other retirement plans (IRA, 401K etc.) variable annuities have no limit to the contribution amount in any given year. This makes variable annuities a great place to allocate larger sums of money rather than being subject to the typical annual contribution limits.

Guaranteed Death Benefit: This variable annuity rider will ensure that a certain amount of money is paid to your beneficiaries in the event you pass away before the contract expires. The guaranteed minimum death benefit can be calculated in two different ways. It is either equal to the initial investment, which protects your heirs from an untimely market slump, or it can be calculated by taking that same principal amount plus a contractually designated interest credit annually. If the investments outperform either of those amounts, then the benefit is null and void because your heirs would receive the full account value.

Guaranteed Income Benefits: There are a few different varieties of income benefits associated with variable annuities so I'll focus on to of the more prevalent.

A guaranteed minimum income benefit (GMIB) works in regard to an annuity that has been annuitized or turned into a stream of income. The GMIB states that you will receive a guaranteed payment regardless of market conditions. It allows you to participate in the market during retirement and profit in the form of increased income if the market performs well. It also protects your base payment from a market downturn.

The guaranteed lifetime withdrawal benefit (GLWB) on the other hand, works during the accumulation stage of the annuity. This rider guarantees a withdrawal basis equal to the initial investment plus an annual interest credit to that basis (usually between 6% and 7%) regardless of the performance of the underlying account value. The annuity still runs will the market but the benefit protects you from a sudden downturn. Also, when you begin to take income, the account still fluctuates with the market and gives you the added benefit of seeing your monthly payments increase over time.

Tax Deferral: All qualified plans have this feature as well but private accounts do not. Securities that are left unprotected from annual taxation will always lag far behind those same securities had they been sheltered from taxes. Also, people rarely stop to think about how damaging the annual taxation can be. Without thinking about it, the average person does not redeem mutual fund shares to pay taxes. Instead, they either write a check from a different account or take a reduced refund. So, the account is not what suffers, but your pocketbook does.

Negatives: High Fees: This is the major sticking point for most experts. All of the additional riders on variable annuities come at a cost. With all the bells and whistles, annuity contracts can run fees as high as 3%. That is a hefty burden that almost completely negates and tax advantages you'll get from the annuity strategy. The fees associated with variable annuities need some serious evaluation. What benefits do the extra riders provide? Is it something you really need or want? Eliminating some of the add-ons will reduce the annual fees accordingly.

Limited Investment Choices: The choices for asset allocation in variable annuities are usually limited to thirty or forty different funds. This gives you less flexibility for changing strategies along with the market over time. The number of options is far greater than the number available in most 401Ks, but it pales in comparison to the options you have in an IRA or a private account. If you have a family of funds that you favor, you may be satisfied with that but active traders will likely want more freedom than annuities can afford to give.

Inflexibility- In annuity contracts with GMIB or GLWB riders, you may find that the 'guaranteed' rates that are emphasized are not actually guaranteeing your principal, but rather just your future withdrawal basis. This is kind of confusing but critical to understand if you want to find the best combination of safety, flexibility, and profitability. These contracts severely limit flexibility. Additional free resources on these products are available through our links below.

This should give you a good starting point if you are considering the variable annuity route. Don't forget there are a host of other factors an individual must consider before a long-term decision is made. A full understanding of the pros and cons of annuities in general is imperative.

For a more in depth analysis of the pitfalls of Guaranteed Lifetime Withdrawal Benefit annuities, be sure to visit AnnuityStraightTalk.com for a free report. Please also look for our Annuity Report that will tell you everything you need to know, not just what you want to hear.