10 Things Life Insurance Agents Won’t Say: Thing #4

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Posted Oct 09

Unfortunately, “Personal Finance Reporter” Daniel Goldstein published 10 financial myths in a row, all at once.  This post moves on to Thing #4 that life insurance agents won’t say:  “This variable annuity is like a really expensive mutual fund.”  Well, they won’t say that because they can’t.

Variable annuities are securities.   Securities registration and licensing are required before an agent can even discuss them.  Most don’t find it worth the trouble.
To his credit, Goldstein actually understates the downsides of variable annuities, to wit:

  •   “. . . withdrawals from an annuity during the first 10 years of the contract can be assessed fees of as high as 8% . . .”  Actually, surrender charges of 10% aren’t uncommon.
  •    “their annual expense ratios can reach as high as 3%”.  I’ve seen annual fees, including riders & subaccount fees, as high as 4.5%.

 Then he drags out the tired old “high commissions” and “too complex” criticisms.  A full understanding of any financial product- even CDs -is very complex.  But the upshot of variable annuities is that contributions are virtually unlimited (unless a “qualified” account), earnings are tax-deferred until taken, and you can participate in most of the underlying subaccount gains while enjoying principal and income guarantees (if you add the appropriate riders).  Which question matters most?:  Is it complex?  or, “Will it best accomplish my goals?”

Sadly, it is when the market is booming that people flock to variable annuities, dazzled by short term performance and oblivious to the fees.  I do agree with Goldstein that there are less risky, more economical options.