Monday, July 22, 2013

Buyer Beware with Variable Annuities

Variable Annuities are one of the most broker sold products out there. The reason is that the commissions on these products are very lucrative. Generally, they can range from 6 - 10% in commissions to the brokerage firm.

What is generally glossed over during the sales process are the surrender charges. The surrender charges can get as high as 14% or more in the first year and decline from there over a ten year period or sometimes even longer.

Also, the expenses on these policies are very high and sometimes can be in the 2.5% to 3% per year range. Common sense would tell you that this acts like an anchor on a boat. You are not going anywhere as long as you have that kind of an anchor holding you back.

Further, brokers often tout the 10% free withdrawals, but fail to tell you that this does not start until one year and a day later.

Perhaps, the biggest fallacy in regard to Variable Annuities are these Guaranteed Minimum Withdrawal Benefit Riders. Most of these riders have a 5% guarantee. Here is where it gets confusing. These policies have a 10% free withdrawal already. So, the 5% GMWB Rider is of what benefit? Why do I need to pay 0.50 to 0.75% per year additional for a 5% GMWB Rider if I am already getting a 10% free withdrawal without any rider charges? This will knock my annual expenses up closer to 3% to 3.75% per year!

The broker's answer is that the Variable Annuity invests in the stock market and in case the broker's advice is horrible and the policy loses money, then you are still guaranteed the 5% withdrawals with the GMWB Rider. Gee thanks. Just what I need, an investment weighted down with expenses that most likely is going to perform poorly, because my broker doesn't have a clue how to diversify it.

Oh by the way, did I mention that there are several insurance companies who are panicking about having these GMWB Riders on their Variable Annuities and are offering to buy their policy holders out with cash payments? Could this be a clue that maybe that cannot guarantee the 5% GMWB Rider like their broker claims?

Another thing. The 10% free withdrawal is a cap, so technically you can pull out only 5% if you wanted. Again, why do you need to pay for the cost of the GMWB Rider every year? I for one am unconvinced.

One final point on Variable Annuities. Did your broker tell you that if you really wanted to buy a Variable Annuity, then you can find them without any commissions or surrender charges? That's what I thought.

I recently tried my hand at producing a short video that shows the broker sales process to unsuspecting buyers. After they buy the variable annuity, then this is when they find out all the sordid details.

Please forgive as I am not a video producer, but I think I get my point across. Click the link below to go to our web site. Enjoy.

Meet Wally Street