From their introduction in 1970s variable annuity have become famous as one of the most preferred retirement plan for many over the age of 59. However and as it has been said, variable annuities may not be the best investment due to the disadvantages associated with them.
A variable annuity can be defined as a contract happening between an insurer and yourself that will enable you to purchase an annuity and the insurer to make payments to you immediately or after some time depending on what you specify. The variable annuity can happen by making a single purchase or a series of subsequent purchases.
Due to the decline in stock changes that have been happening between 1999- 2009 the variable annuities have not been positively affected. In fact, before your decision to undertake the variable annuities, request a prospectus from the insurance company that is giving you the annuity. From the prospectus, learn about the rules, the challenges, opportunities, purchases, payment and withdrawals. This way you will clearly understand the dangers of undertaking variable annuities.
Below are Hidden Fees of Variable Annuities
Many who decide to take the variable annuities will defend themselves by claiming that there will be tax deferrals for them. What they however do not understand are the challenges that comes with the tax deferrals. Tax deferral basically means that you won’t pay any charges on the money until you withdraw it. Well that sounds enticing, however, after withdrawal of your money you will be taxed the regular tax incomes on the income rather than capital incomes which is a bit cheaper. Either way, this indicates that the tax deferrals will still be accounted after withdrawal of the money.
The period occurring between the purchase of a variable annuity and the time of withdrawal is known as the surrender period. In this period, you are not required to withdraw any money from the purchase you made, but sometimes you can be allowed to withdraw a small percentage of the purchase made. If however you withdraw the money from the insurer before the period of time expires, then a payment will need to be paid to the insurer for selling you the payment. This small fee will be a given percent of the purchase made. (Typically decreases as time passes) This payment is called the surrender charges. They may seem minute at the time of mentioning but can contribute a large amount in case of regular withdrawals.
Mortality and risk charges
Mostly 1.25% per year, the risk and mortality charges are paid to the insurance company as a compensation of the risk of signing the variable annuity contract with you. The fact that this payments are made annually, means that a big percentage of your payment will pay the insurer of the mortality and risk charges.
Other charges associated with variable annuities include administrative fees, underlying fees expenses and other fees for other features.
Generally, before undertaking a variable annuity, read the prospectus well, do your probable calculations to determine whether it is the retirement plan you want to take.