Make the most informed decision when comparing variable annuities – everything you need to know

What are the risks associated with variable annuity charges?

Variable annuities are a type of retirement product that offer potential growth for retirement investments. Although this product offers many benefits, it is important to understand the associated risks associated with variable annuity fees.

The most common risks associated with variable annuity charges include the following:

• Surrender Charges – Surrender charges are the charges for withdrawing money from a variable annuity before a certain period of time. These fees can be applied for up to 12 to 15 years or more and can range from 4% to 10%.
• Management/advisory fees – Variable annuities usually come with management fees ranging from 0.75% to 2.25%. These fees are usually calculated as a percentage of the account value.
• Mortality and expense risk charges – Mortality and expense risk charges are the charges used to help cover the cost of mortality risk in a variable annuity. These fees generally range from 0.25% to 1% of the account value per year.
• Sub-account fees / investment expenses – Variable annuities typically offer different investment options, such as mutual funds, exchange-traded funds, or other securities. Each of these options usually comes with an expense ratio, which is usually a percentage of the amount invested.
• Selling charges – Some variable annuities come with selling charges, which are fees used to cover the cost of the product and compensation for the salesperson who sold it. Selling charges generally range from 0% to 8.5%.

When considering the purchase of a variable annuity, it is important to carefully consider the associated risks and do your research to understand the various charges you may be subject to. Additionally, it is important to speak with a qualified financial professional to ensure that you are making the best decision for your financial goals and objectives.

Key points to remember

• It is important to consider comparator factors, fees, benefits, investment options, liquidity, performance, insurance provider and risk/reward when evaluating variable annuities.
• Contributions to variable annuities are not deductible, but the funds will grow through tax.
• Withdrawals are generally taxable and may be subject to state income taxes.
• The tax implications can vary depending on the annuity, so it is important to understand the tax rules of the annuity that is being considered.

What are the costs of a variable annuity?

Variable annuities can be an efficient and cost-effective way for investors to save for retirement, but there are several fees and costs to consider. These costs can vary widely depending on the provider and individual annuity, but generally include the following:

• Mortality and Expense (M&E) Charge at Risk: These charges drastically act as financial support for the annuity issuer, whose benefits are guaranteed by the contract. The amount of this risk charge depends on the underlying investments within the annuity and the issuer, but generally falls in the range of 1 to 3% percent per annum for a variable annuity.
• Administrative Fees: Administrative fees cover a variety of costs associated with managing the annuity, including record keeping and investment management. Usually, these fees are in the range of 0.25 to 1% per annum.
• Insurance Fees: Insurance fees generally apply when additional benefits, such as a death benefit, are added as features of the annuity. Costs can vary depending on particular riders, but prices are generally between 0.3 and 1% per year.
• Addition of fees: Although not all variable annuities impose surrender fees, many providers do. This fee applies if the annuitant seeks to withdraw the full amount or close the contract before the surrender period ends. In such cases, the investor is usually charged a rebate fee of up to 10-12%, although lower rates may be possible.

It is important for an investor to carefully consider the fees associated with a particular contract before making a purchase. Implementing time to read the prospectus and research through comparison services can help investors identify the best annuity for their needs and reduce the overall costs of their purchase.

What are the tax implications of a variable annuity?

A variable annuity is an insurance-based retirement planning product that offers the potential for delayed growth of your funds and a guaranteed stream of income payments. As with any investment, it’s important to understand the tax implications for a variable annuity and consider any potential taxes to determine if it’s right for you.

General tax implications

When funds deposited into a variable annuity are invested, they are generally subject to a tax rule known as “tax deferral”. This rule means that taxes on winnings will not be due until the funds are withdrawn. This can provide greater potential for fund accumulation over time, as taxes are not removed from any investment income. Additionally, it’s important to note that variable annuities come with important features like death benefit and an optional annuitization or income withdrawal rider that can help provide additional benefits and potential tax savings.

Examples and tips

The tax implications of a variable annuity may vary depending on the specific annuity and rider selected. Here are some examples and tips for understanding the potential tax implications associated with a variable annuity.

• Contributions that are made with already taxed dollars to a variable annuity are not tax deductible, but the funds will grow through tax.
• Withdrawals are generally taxable and are considered “ordinary income” which is taxed at the same rate as earnings from salary or wages.
• An optional rider called the “income withdrawal driver” can help limit the amount of tax owed on withdrawals. This jumper can provide the ability to withdraw funds without incurring a 10% premature withdrawal penalty.
• Upon annuitization or conversion of the annuity into a stream of payments, the amount may be taxable as ordinary income. Some annuities allow for a Section 1035 exchange, which allows taxpayers to convert from one annuity to another and defer taxes on all gains.
• Annuity gains may also be subject to state income taxes.

It is important to obtain detailed information on the tax implications of any annuity that is considered. This can help ensure that investment decisions are made with a full understanding of any potential tax consequences. Understanding the tax implications of a variable annuity can help provide more assurance that you can meet your retirement income needs. [Middle_All_All_Templates1]

How do you compare the performance of different variable annuities?

Comparing variable annuities requires careful consideration of many factors. Variable annuities are highly customizable investment vehicles, so the performance of one variable annuity will not be the same as another. To ensure that you are comparing like-for-like annuities and making the most informed decision to achieve your financial goals, there are several key features and characteristics to consider.

What to consider when comparing variable annuities

When evaluating variable annuities against each other, it can be helpful to break down the comparison into the following categories:

• Fees – Review surrender fees, mortality and expense risk fees, asset fees and other applicable fees.
• Benefits – Analyze contractual benefits and other offers such as an income rider, guaranteed lifetime withdrawal benefit and/or death benefits.
• Investment Options – Review the number of investment options and investment categories available to you. Also review the minimum and maximum initial deposit requirements.
• Liquidity – Assess the level of liquidity of the variable annuity. Determine the remittance fee schedule, applicable taxes, and associated tax liability.
• Performance – Analyze the performance of the investments available to you in the variable annuity.
• Insurance Provider – Investigate the financial strength of the insurance company offering the annuity.
• Risk/Reward – Evaluate the overall level of risk associated with the annuity and the potential reward of return on investment.

Performing a variable annuity comparison before making a decision is essential to ensure that you are making the most informed decision. To determine the best option for you, compare annuities against each other across these criteria to determine which offers the most benefit.

How can I determine the best time to invest in a variable annuity?

The best time to invest in a variable annuity depends on a variety of factors, including your current financial situation and your long-term investment goals. Since this type of investment offers tax-deferred growth potential and potential death benefits, it is important to assess personal circumstances and consult with a financial advisor to make an informed decision. Here are some tips and examples to help you determine the best time to make a variable annuity investment:

• If you’re close to or at retirement age, don’t wait too long to make an investment. Delaying an investment could put your long-term financial goals at risk. Although no one can accurately predict what the stock market will do, waiting too long could mean missing an opportunity.
• If you have other investments or enough money set aside to carry you through retirement, consider investing in a variable annuity. The tax benefits and the potential to benefit from market growth make this type of investment worthwhile under the right circumstances.
• If you are younger and want to make a variable annuity investment, you may need to consider how much risk you are willing to take. High-risk investments can result in high short-term returns but are also riskier in terms of long-term growth.
• If you’re already invested in an IRA or traditional 401(k) account, maybe it’s time to analyze your choices. You can benefit from transferring assets from existing accounts into a variable annuity so that you can earn greater returns.

Ultimately, the best time to invest in a variable annuity depends on your individual financial situation. Before making an investment, it is important to carefully review the terms of the annuity, its benefits, tax implications and fees. Consulting a financial professional can help you make the right decision consistent with your investment goals.

What are the advantages of a variable annuity?

A variable annuity is a type of contract between a person and an insurance company that can offer a variety of features and benefits. With a variable annuity, the annuity owner can benefit from potential income and account growth, as well as the potential to pass their savings on to future generations. These are just some of the benefits of a variable annuity:

• Flexibility. Variable annuities offer considerable flexibility, including the ability to choose from a number of allocations or investment accounts. Annuity holders can adjust or lower their investments, depending on their needs or the needs of their beneficiaries.
• Tax meeting. Variable annuities provide tax deferral on profits and growth. Most annuities have a tax penalty if the annuitant takes a withdrawal before age 59½; However, this also means that no tax has to be paid on account growth until a withdrawal is taken.
• Income stream. Variable annuities also have the potential to generate an income stream. An annuity holder can choose to take a lump sum or set up regularly scheduled payments, usually on a monthly basis. For those who need regular income, variable annuities are beneficial as the accounts are allowed to use the account principle and accrued interest to generate income.
• Inflation protection. Variable annuities can protect retirement income against inflation. The insurance company administering the variable annuity may offer what is called an “income rider” which adjusts the income payment to reflect a particular rate of inflation, providing an additional layer of security in retirement planning.
• Death benefit. Variable annuities come with a death benefit, which means that if the annuitant dies, the beneficiary has the option of enjoying the death benefit, either as a lump sum or as an income stream. .

It is important to consult a financial advisor when considering a variable annuity, as there are several details to consider including fees, lock-in periods, tax implications and understanding the terms of the annuity contract. Your financial advisor can help you understand the details of the annuity arrangement and provide recommendations on the best options for you and your beneficiaries.

What are the surrender fees associated with a variable annuity?

A variable annuity usually has shed charges associated with it. A surrender charge is a fee charged for withdrawals or other transfers made in the early years of the annuity contract. It is intended to discourage withdrawals and in many cases the rebate charge gradually decreases to zero over a period of years.

Below are some examples of surrender costs associated with variable annuities, along with some helpful tips to consider:

• Short-term surrender charge : Many variable annuities have a short-term charge of 5 to 10 years. This means that if you make a withdrawal during the first 5 to 10 years of the annuity contract, you will incur charges of surrender. Rebate charges are usually in the range of 5% to 10%. It is important to understand the costs of these rebate fees, as well as the rebate period, before investing.
• Delayed surrender charge : Some variable annuities charge an additional fee for any withdrawals made after the short-term surrender period ends. Typically, these fees will last for the term of the annuity. As with short-term surrender fees, it is important to understand the costs of these fees and the length of the deferral period before investing.
• Market value adjustment : Finally, some variable annuities impose a market value adjustment (MVA) each time a withdrawal is made. AMVs are generally based on the current market value of the underlying investments and can vary widely. It is important to understand the details of MVA before investing in a variable annuity.

Overall, it is important to understand the various surrender fees that may be associated with a variable annuity before investing. Understanding the terms and conditions of an annuity can help you make an informed decision that best suits your financial goals and objectives.

Conclusion

Ultimately, understanding the full scope of a variable annuity is of paramount importance. Taking the time to compare different annuities and weigh their key features, such as fees, benefits, investments and tax implications, can help you make the most informed retirement planning decision. Also, be sure to speak with a qualified financial professional to ensure you are making an informed decision.