Variable annuities are complex financial products designed to transfer the risk of market loss from the investor to an insurance company. Assuming the investor is risk averse (after 2008, who isn’t?), the question is, is it a good deal? The answer, according to MONEY Magazine and most advisers that do not sell variable annuities for a living, is no. (“No Pot of Gold,” Lisa Gibbs, MONEY Magazine). Whether the answer is yes or no, an investor needs to be an actuary as well as a competent, very careful reader of fine print and convoluted legalese to fully understand exactly what he or she is buying, how it is priced and whether or not it is a good deal. Most investors are not up for that job.
Variable annuities are costly. Selling agents collect 5 percent or more of the purchase price off the top and 0.5 percent or more of the investment each year. A variable annuity with common riders takes away 3.61 percent of annual returns, according to the article. If the investor needs to cash out in the early years, say to meet an unanticipated expense, surrender charges of as much as 9 percent may apply.
What has propelled sales of variable annuities in recent years is a rider known as a Guaranteed Lifetime Withdrawal Benefit (“GLWB”). According to the industry, nine out of ten purchasers of variable annuities select the GLWB or similar rider. Smart Money says: “The question is, Do they really know what they are buying?” Almost certainly not. “The riders have made a complex product more complex,” John Cronin, securities director for the state of Vermont, was quoted as saying. Significantly, this all-important rider has become more costly and less generous, but that fact is hidden in the complicated terms of the contract.
“The product’s detractors in the financial planning community argue that there are cheaper ways to achieve similar results, and MONEY generally agrees.”
The insurance companies that sell variable annuities have it all figured out. They are buying the market risk that investors want to get rid of. Insurance companies have employed experts to analyze and compute the pricing and impose the contractual terms and conditions that make it advantageous to them to accept that market risk. Investors have not. Who is going to win that zero-sum game?
Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.