About Variable Annuities
If you own a variable annuity, you should periodically review the product to be sure you understand what you own and how to best utilize it in today’s environment. Unlike most other investments, a variable annuity is a contract between the investor and the insurance company. Contracts that were issued prior to the 2008 financial crisis were written when interest rates were higher, market volatility was lower, and everyone was less concerned about risk in general. Benefits of a variable annuity may have been a fair deal for the investor at the time the contract was written, although the popular opinion was that they were often a great deal for the insurers.
Variable annuities are long term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They have fees and charges, including mortality and expense risk charges, administrative fees, and contract fees. They are sold only by prospectus. Guarantees are based on the claims paying ability of the issuer. Withdrawals made prior to age 59 ˝ are subject to 10% IRS penalty tax and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value.
Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.
The variable annuity industry has changed dramatically in the last four years. The current low-interest rate environment and recent market volatility have caused many, including insurance companies, to think differently about variable annuities. Insurers have since dramatically scaled back the benefits and features by eliminating them entirely, raising the cost, lowering the guarantees, or imposing new restrictions. Some are trying to further reduce their exposure by offering to buy-back the riders from clients.
Benefits of Older Contracts
Many investors have older, “vintage” variable annuity contracts with benefits and features they may not fully understand or appreciate. In numerous instances, the broker who sold the product may not have fully understood or appreciated them either. When compared to alternatives available today, “vintage” variable annuity contracts offer benefits and features that may be more valuable than the contract owner realizes.