This will take some time, but it will be worth it. Needless to say, before you fire the gun, know which way its pointed:
FOSSIL:
When you buy a traditional (fixed) annuity, you purchase and contribute to it during your productive years, and then begin receiving prefixed payments in retirement. You don't pay taxes on your yearly investment income and only begin paying taxes when you start receiving the payments.
FFEJRETSO:
Did you know that you can buy a fixed annuity today that pays 4% in yr 1, and 3% yrs 2 thru 5 - guaranteed and tax deferred? At the end of the fifth year, you have a 30 day window to cash out (pay ordinary income taxes) or roll it over tax-free to another annuity?
For people above 59 1/2, Compare that to a CD today - same tax treatment on the earnings (ordinary income), better yield.
NO requirement to covert it to income, altho you could if you want to.
Just a pure and simple CD alternative, and if you don't need the income, you don't get a 1099 - UNLIKE the CD where you get one whether or not you take out the income.
How many retirees are looking for decent CD alternatives today?
FOSSIL:
However marketed, variable annuities should not be confused w/ life insurance. There's only the tiniest bit of insurance in them. When the owner of a variable annuity dies, the estate or beneficiary is guaranteed return of the owner's original investment. In some cases, a very minimal return is guaranteed as well. This benefit does not come cheaply, however. You pay a mortality and risk-expense fee, generally over 1% per year.
FFEJRETSO:
Imagine that you bought $100,000 of an aggressive growth fund in April of 2000, and bought the same fund (called a subaccount) in a variable annuity at the same time.
Imagine looking at your statement today, to see the cash values of both down 50% (hey, add 3% more loss to the VA subaccount due to the Mortality and Expense charges)
Assume that you had a heart attack looking at the statements.
In the mutual fund, your beneficiaries get the current value - $50,000 in my example.
What do the beneficiaries get, without probate, on the variable annuity???
Can you say $100,000?
PLUS, many plans today guarantee 5% or more GROWTH on the initial investment amount for death benefit purposes...
FOSSIL:
3. Economically, there is not much difference between mutual funds and variable annuities, especially when an annuity is invested in mutual funds.
As a regulatory matter, however, the products differ a great deal. The SEC regulates the mutual fund industry. They require a host of disclosures.
There's no federal regulator, however, of the variable annuity industry. Any disclosures depend upon in which of the 50 states the insurance company operates.
FFEJRETSO:
The NASD and the SEC, PLUS the various state insurance commissioners ALL regulate Variable Annuity sales, and the sales practices of the reps who sell them.
Additionally, ALL variable annuities are sold by prospectus, which are filed and approved by various regulatory bodies.
FOSSIL:
4. To discourage you from recognizing the error of your ways and fleeing to a better investment, annuities frequently have "surrender fees" of up to 7%. While these fees generally come down over time, they are just like sales loads on mutual funds and should be avoided.
FFEJRETSO:
Many variable annuities are available with no front OR back end load. Although these have somewhat higher ongoing fees than other types of variable annuities, if you don't like the performance, you can always leave with no penalty, and no tax on gains if you roll over to another annuity.
FOSSIL:
. Amazingly, in recent years over half of all variable annuities have been sold w/in 401(k)s or other tax-sheltered retirement plans, where the annuity's tax benefit is entirely superfluous - that is, worthless. That is a crying shame, particularly if one of those plans is yours.
FFEJRETSO:
Talk to a beneficiary who receives the proceeds of an IRA invested in a Variable annuity in 2000, per my example above.
Talk to a retiree who rolled their 401k over to a Variable Annuity with "Living Benefits" that guarantee 5-6% compounding on assets, if used for income seven to ten years later, or any of the other versions of this that protect principal NO MATTER HOW THE FUNDS PERFORM.
The crying shame is the ignorance many people have about this investment alternative. Investors suffer because of it, their beneficiaries suffer, and the professionals who help people choose from these as potential alternatives suffer, all because of people who talk (and post)before they REALLY know the facts.