How Variable Annuites Work: How To Choose | Pros and Cons

by Danny Howes | Annuities

Variable Annuities | Helpful Tools

Learn about different share classes, fees, riders, benefits and draw backs of a variable annuity.

Variable Annuity:

Variable annuities can be powerful tools for your retirement.  However, they can also be very inefficient and costly.  This is a checklist that we hope you’ll find helpful if you are considering a variable annuity.  This can be helpful if already have a variable annuity, and are wondering if it’s still the best fit for you.  This is not an all-inclusive list, but can be helpful, especially if this is new territory for you.

Know your options:

All too often we’ll see situations where someone has made the big decision to purchase a variable annuity based solely on the recommendation of a broker or advisor.  Many times they were only shown one option, and not educated on why that particular choice is best for them.  There are so many different products in the marketplace.  That can be a good thing, but it can also make it so very difficult to determine what is best for your situation.  They key thing here is to make sure you have explored more than just one option.  Illustrations are commonly used in the sales process of these annuities.  The illustrations provide insight into hypothetical growth potential, often times based on historical performance.  Illustrations can also show how much guaranteed income is possible, death benefit values, and other key elements that are important to your situation.  Again, looking at multiple illustrations can help you make informed decisions.  The more information you have to consider, the better your chances of making a smart decision.

Company Selection:

There are a tremendous amount of companies in the marketplace who sell variable annuities.  It is important to know the strength of the company you are considering.  Insurance companies are measured and rated by several 3rd party non-biased agencies.  An example of a few of these agencies are: Standard and Poors, Moodys, Am Best, Fitch…the list goes on and on.  The comdex score can be an important tool as well.  Many times you’ll see conflicting opinions from the various agencies, and they use different metrics to form their ratings.  Look for consistency among them for the carriers you’re evaluating.  Remember, the guarantees that the companies claim are based on the company’s ability to make good on those claims.  Guaranteed income, death benefits, and even returns of premium are based on the company’s financial ability to do so.  This is why it’s so important to evaluate their financial strength.

Rider Selection:

Many times, if not the majority, variable annuities are purchased with a rider that provide some sort of guarantee.  These riders promise such things as lifetime income, death benefit enhancements, and a return of premium or initial investment.  These riders can be very valuable in providing security, peace of mind, and meet financial goals.  It is vital to determine the scope of the guarantee.  When does it “kick in”?  Can it be revoked because of an action taken?  Does it eventually run out?  Remember, insurance companies and investment firms know how to make money for themselves.  They design products that make them a profit.  These riders can be costly, and contain caveats that can literally null and void the benefit due to withdrawals, term periods, and other factors they decide to include.  Be thorough, read the prospectus, and ask lots of questions.

To Wrap It Up:

Variable annuities are very complex investments.  Many times the folks who sell them try and simplify the language, and make the decision not so intimidating.  Remember, the brokers who sell these products make a commission.  Many times they are not fiduciaries, and if they’re not, they are not held to a best interest standard.  This leaves you, the investor, to look out for your own best interest.  That’s what this tool is meant to help you with.

Check back with us soon, as we will be adding valuable information regarding share classes and details on how riders work


Vero Beach Advisor, Danny Howes, Danny Howes, EA, RFC
NAEA, Danny Howes, EA, RFC

Financial Advisor Vero Beach | Treasure Coast

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