Problems With Variable Annuities
- Perhaps the main problem with setting up a variable annuity is that the insurer will, in nearly all cases, charge the person a boatload of fees. While a simple investment in securities may cost you the expenses associated with hiring a broker and an investment adviser, insurers charge holders of variable annuities steep fees not only for setting up the annuity but also for maintaining it through the year in which you hold it.
- Another problem with variable annuities is that the money you take out of it is taxed like regular income. By contrast, a large number of retirement funds are exempt from these taxes. Worse still, if you die with money left in your annuity, then these taxes will be passed on to your beneficiaries. According to "The Wall Street Journal's" Smart Money website, many other kinds of investment accounts do not carry this same penalty.
- Many annuities require a so-called lockup period, in which you cannot begin to withdraw money from your account. Some annuities promise you a so-called death benefit that will kick in if you die before you have taken any money out of your annuity. According to Smart Money, while this benefit may make financial sense for someone who dies almost immediately after taking out the policy, for most others it will make little financial sense.
- The last main problem with variable annuities is the risk associated with them. Depending on the movement of interest rates, the amount of money you receive from your account will vary. While a person with a fixed-rate annuity can plan on receiving a steady income, a person with a variable-rate annuity may see his payments drop sharply under certain conditions, such as a decline in his investments or in interest rates.
Expensive
Taxes
Death Benefits
Risks
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