15 Sep Variable Annuities: What You Need To Know About These Financial Traps
If you know anything about annuities, you probably already know that variable annuities are some of the most despised annuity settlements on the market today. Everyone, from your local financial adviser to celebrity economist Suze Orman, will advise you not to invest in a variable annuity.
But why exactly are variable annuities so questionable? If you’re in the middle of one right now, why might you be interested in selling your annuity? Let’s start at the beginning.
- A variable annuity is essentially an agreement between the buyer (you) and an insurance company. You invest a lump sum of your own money into that company’s account, and the company returns that money to you in smaller payments over a period of time. The payments might begin immediately (within 30 days) but they usually begin after a certain length of time or when you reach a certain age (59.5 years old).
- The money you invest into the account isn’t taxed while it’s sitting in there — which is one reason why many lottery winners choose a lottery annuity settlement rather than a lump sum lottery payout — but you’ll have to pay taxes on the money that’s paid back to you.
- Another major benefit of variable annuities is that you can choose a payment option which provides you with money for the rest of your life. You can also include your spouse in the agreement, and if your spouse should outlive you, he/she can continue to receive the payments.
- Variable annuities are considered long-term investment strategies and they’re often substituted for retirement plans. During the first phase of accumulation you can determine a specific percentage of your investment earning to be funneled into your annuity investment. This is why variable annuities are risky, because the amount of money brought into your account is dependent on how well your other investments are doing.
- Variable annuities are not so great, however, because there are many strings attached. Annual management fees can run as high as 2% or 3%, while other features, like having a guaranteed minimum income or death benefit package, usually charge between 1% and 2%. The more features you add on to protect yourself, the more you pay in fees.
- Additionally, many people decide to sell annuity payments because they face high withdrawal fees if they try to take out more money than the regular payment schedule allows. This is especially common when lottery winners chose to receive lottery payments in the form of a settlement.