Frequently Asked Questions Variable Annuity

 

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11 March 2009 Wednesday 11:46 AM EST

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TITLE: Variable Annuity Questions Answers

Signature: Melissa Gannon, Director of Insurance and Bank Ratings.

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The explosion in sales of variable annuities in recent years has prompted much debate about whether many consumers understand what they are buying.

As sales agents or customers are insisting unknowledgable more to blame is a matter of opinion. What is certain, however, is that this market downturn has been difficult to take a dose of love for millions of pension holders.

Variable annuities are insurance products that enable the holders to put to retirement. A deferred tax, the return on investment varies depending on the performance of the underlying investments in the separate account funds, sometimes called portfolio investment or subsidiary.

Those who purchased variable annuities to meet the specific needs with guaranteed results feel like kings of the world now. They were most frequently isolated from declining markets. These are the people whose securities are at the heart of problems for companies like Hartford Financial (HIG: NYSE), Lincoln Financial (LNC: NYSE) and Prudential (PRU: NYSE).

But those - and there are millions of them - who purchased variable annuities based on unrealistic expectations / promises of market returns without guarantees are devastated.

First, it is necessary to explain a fundamental principle of variable annuities: The difference between the account value and guaranteed withdrawal benefit value of the contract. The value is the amount you've deposited more or less any earnings or losses of underlying investments. After deducting all expenses of sale, the amount you get if you put the policy. Guaranteed withdrawal value is different. This is the amount you originally deposited plus the annual rate of credit guaranteed. This amount can be withdrawn in a lump sum, it is the guaranteed annual value from which benefits are paid to you over time. Many people do not understand this distinction. Which has been isolated?

Holders of variable annuity that are best positioned in this market extreme are those who: * a) a guaranteed withdrawal benefit may withdraw from 5% to 7% per year for life, regardless of performance Market * b) does not depend on the income from variable annuity over 5% to 7%. For these people, the account value, which fluctuates depending on market performance is irrelevant. The withdrawal of benefits could increase the amount indicated above, if the market rises, but that should be considered icing on the cake.

"It has always been the case, but this proves that the market downturn should never buy a variable annuity without any benefit from the guarantee of withdrawal," said Randy Shine, a fee-based certified financial planner with Shine Financial Deerfield Beach, Fla.. Otherwise, they are entirely to thank you for market performance.

An unfortunate aspect is that the vast majority of people do not understand the meaning of the guaranteed withdrawal of value - the amount that has increased annually by 5% to 7% rate guaranteed.

"Eight of the 10 people who call our office to ask for advice do not understand what they have," said Ken Nuss, CEO and founder of AnnuityAdvantage.com. "They believe that the guaranteed benefit value may be withdrawn in a lump sum."

These investors want to withdraw cash of that amount, but can not, "he says. However, if they need all the cash now, they can only withdraw the account value which is about 40% during the year, he said. Who has been hurt the most?

On the contrary, people who own a variable annuity without a guaranteed withdrawal benefit are in the accumulation phase of their contract, were injured the most. The drastic decline of the market has essentially eliminated all of their accumulated earnings in recent years, even if the annuity is only a couple of years.

According to Nuss, the most unfortunate in this group are those who are already retired or in a year or two of retirement who have planned to use the variable annuity product for a living. They simply do not have the time to make the loss.

Worse yet, people are those who have purchased a variable annuity expected to earn a certain amount each year, but also to withdraw. In many cases, the sales agent of these variables annuities on the assumption that the average earnings to exceed significantly the percentage to be withdrawn. These people are essentially reverse dollar cost averaging by the withdrawal from the market declines, which means that they are accelerating the decline of their account value. Why buy a Variable Annuity now?

Shine Nuss and both agree that variable annuities can still be used for purposes of retirement planning. If you have a specific need that can be achieved by the characteristics of a variable annuity, then you should consider, even in this uncertain market.

Avoid taxes, however, should not be one of those reasons, "said Shine. Income and capital gains are historically low. Why would you defer taxes to pay now than later when they could very well be higher? Do not let the tax tail shaking the dog.


A guaranteed withdrawal benefit for life could be a reason to buy one. A death benefit increasingly offered on certain policies, may be another reason to buy one. Variable Annuities are safe?

Now more than ever, it is very important to buy your annuity from a financially healthy. If the insurance company fails during the accumulation phase of the annuity, or while you take a guaranteed income benefit, you will receive your account value, as it is in a separate account which has nothing to do with the general accounts of the company.

However, if you're in the annuitization phase of the contract, your property has been transferred to the general accounts of the company, and you're like any other insured. What is your return is subject to the limit of the guarantee of the association, which varies by state. You should always check the financial soundness of the insurance company selling the annuity.

TheStreet.com Ratings issues financial strength ratings of each nation in 8600 and banks savings and loans that are available free of charge on Banks and Thrift Screener. In addition, the financial strength of 4000 votes for the life, health, annuity, and property / casualty insurers are available on insurers and HMOs Screener.

LOAD-DATE: 12 March 2009

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