| If the declining market has diminished your tolerance | | | | charges the investor high recurring fees to recover this |
| for investment risk, you are a prime target for variable | | | | expense. Additionally, separate hidden recurring fees |
| annuity salespeople. Market volatility commonly | | | | are charged by both the insurer and the underlying |
| influences investors to pay the high fees associated | | | | funds. After adding the cost of living benefit riders to |
| with variable annuities for the perceived safety offered | | | | the contract, fees often exceed 3 percent per year. |
| by these complex investment vehicles. Before buying, | | | | Comparatively, according to Morningstar the average |
| take time to understand features that salespeople | | | | domestic mutual fund charges 1.35 percent. |
| may not discuss. | | | | Surrender Charges |
| Annuities 101 | | | | Another consequence of high commissions paid to |
| Variable annuities enable investors to defer taxes on | | | | salespeople is the attachment of a surrender charge |
| investment gains until money is withdrawn. Additionally, | | | | to annuity policies. Surrender charges discourage |
| variable annuities have a death benefit guaranteeing | | | | investors from withdrawing funds before the insurer |
| the beneficiary a specified amount - usually the | | | | recovers the commission paid to the salesperson. This |
| amount invested - upon the investor's death. For a fee, | | | | charge usually starts at 7 to 15 percent and commonly |
| most annuities offer "living benefits" guaranteeing a | | | | declines over 5 to 15 years. |
| rate of return (usually 2 to 5 percent) over time. Upon | | | | Living Benefits Not Beneficial |
| withdrawal, payment can be taken as desired, or | | | | Many living benefit programs require the investor to |
| converted into a fixed periodic payment. Funds | | | | hold the investment for at least 10 years to achieve |
| withdrawn before age 59½ suffer a 10 percent | | | | the guaranteed rate. There has been few times when |
| penalty. For more information, visit the SEC's website | | | | a balanced portfolio of stocks and bonds didn't return |
| at | | | | at least 5 percent annually over a ten-year period. In |
| Unfavorable Tax Treatment | | | | fact, it took the stock market only eight years to |
| Investments in taxable accounts are taxed at capital | | | | recover during the Great Depression. Also, these |
| gains rates, currently between 0 and 15 percent. | | | | guarantees are dependent on the insurer's financial |
| Annuity gains are ordinary income, currently taxed | | | | stability. Recent trends suggest insurers may not be |
| between 10 and 35 percent. Perhaps the biggest | | | | able to pay guaranteed rates amid market volatility. |
| drawback of variable annuities is the lost tax benefits | | | | The Bottom Line |
| upon the investor's death. Most investments receive a | | | | Annuities are appropriate for specific circumstances, |
| "step-up in basis" that eliminates or drastically reduces | | | | such as leaving assets to qualified charities or providing |
| the taxes heirs must pay when selling inherited assets. | | | | extremely risk adverse investors with guaranteed |
| Annuities don't receive a step-up in basis so heirs must | | | | income. If you believe an annuity would serve your |
| pay taxes on the difference between the investment's | | | | purpose, it's time to learn a well-kept secret: you can |
| cost and current value. | | | | purchase an annuity without funding a salesperson's |
| High Expenses | | | | vacation. No-load (no-commission) annuities commonly |
| Annuity salespeople are commonly paid an up-front | | | | charge less than half the recurring fees of loaded |
| commission ranging from 5 to 10 percent. | | | | annuities and have no surrender charge. No |
| Consequently, upon the sale of a $100,000 annuity, the | | | | salesperson is going to discuss this option. A fee-only |
| salesperson receives as much as $10,000 up-front and | | | | financial advisor who isn't influenced by |
| has no financial motivation to ensure the client's | | | | commission-based compensation can provide an |
| satisfaction after the sale. Although the purchaser | | | | objective opinion on whether an annuity is a wise |
| doesn't pay the salesperson directly, the insurer | | | | investment and direct you to a no-load product. |