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Last year the people making my taxes suggested a variable annuity instead of my traditional IRA. This variable annuity was supposed to guarantee 8% return year after year with no exception or market value whatever is higher in every period.

It was too good to be true, and I did not have time to research, so I decided to pass in the offer and go with the known IRA account.

Now I am back thinking of the sure business, and I am wondering what kind of people buys Variable Annuities. Just to see if I fit this profile.

Thanks for your help, and to the "Personal Finance and Money" people, Thanks!

Geo
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4 Answers4

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An annuity makes sense in a few different scenarios:

  • You need life insurance, but are not insurable. Annuities can come with death benefits and even income streams after your death. The insurance is essentially secured by your lump sum payment.
  • You have a lump sum at retirement and have no confidence in your ability to manage your money.
  • You have a lump sum at retirement or for a dependent and have no confidence in your spouse/dependent's ability to manage an income stream or heed informed advice.
  • You have a marginal retirement nest egg and an expectation of an exceptionally long lifespan. (Annuity payments are tied to your death.)
  • You have alot of money and need a tax shelter for future growth.

In general, they are not the best deal around (and are often ripoffs), and will almost certainly be a bad deal if pitched by a tax preparer, insurance salesman, etc.

Keep in mind that any "guarantees" offered are guarantees made by an insurance company. The only backing up of that claim in the event of a company failing is protection from your state's Guaranty Association. (ie. not the Feds)

duffbeer703
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Two types of people:

(1) Suckers

(2) People who feel that investment advisors/brokers make too little money and want to help out by paying insane commissions.

Think I'm kidding. Check out this article: "Variable Annuity Pros and Cons"

Seriously, for 99% of us, they are a raw deal for everyone except the person selling them.

JohnFx
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There is always some fine print, read it. I doubt there is any product out there that can guarantee an 8% return. As a counter example - a 70 yr old can get 6% in a fixed immediate annuity. On death, the original premium is retained by the insurance company. Whenever I read the prospectus of a VA, I find the actual math betrays a salesman who misrepresented the product. I'd be really curious to read the details for this one.

JoeTaxpayer
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4

I wrote a detailed answer about variable annuities on another question, but I want to include one specific situation where a variable annuity may be the right course of action. (For the sake of simplicity, I'm quoting directly from that answer):

Three-quarters of US states protect variable annuity assets from creditors. Regular IRA's don't benefit from protection under the Employee Retirement Income Security Act (ERISA) and may therefore be more vulnerable to creditors.

If you're a potential target for lawsuits, e.g. a doctor worried about medical malpractice suits, variable annuities may be an option for you. As always, you should consult a legal/tax professional to see if this might be a good option for you to consider.

The SEC also has a fantastic publication on variable annuities that provides a great deal of information. It's not directly related to this question because it doesn't necessarily focus on the circumstances in which they might be a good fit for you, but it's educational nevertheless and should give you more than enough information to properly evaluate any policy you're looking to buy.

Community
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John Bensin
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