Debunking Variable Annuity Myths

Variable Annuity

In the past, purchasing a variable annuity have been a popular investment option for those looking for long-term financial security. Several types of non-qualified annuities that can be purchased from investment companies provide a steady stream of income, typically for retirement. Potential investors can choose between a fixed annuity, which provides a guaranteed payout, or variable annuity, which allows the holder to diversify their portfolio and appoint a beneficiary.

Because of all the options associated with the latter, variable annuities are complex investment vehicles, so it’s important to separate the facts from hearsay. Discover the truth about commonly held beliefs concerning variable annuities by reading below.

Anyone can invest in a variable annuity.
True. Anyone who can afford it can purchase a variable annuity. As the saying goes, just because you can do something, doesn’t mean you should. If you’re someone who has maxed out their 401k and IRAs, then a variable annuity might be a good fit for you. Moreover, if you are willing to wait 10 to 20 years to receive payouts, then investing in an annuity is a good option. However, if you haven’t maxed out contributions to qualified plans or don’t want to wait around for a decade or more to receive payments, then an annuity is not worth your money or time.

You keep all the money for annuity disbursements.
False. Despite what the amount you’re projected to earn, variable annuity sellers will tell you it costs money to maintain your investment. Variable annuities have more fees associated with them than any other investment product, and consequently more money will be deducted from your principle every year. Besides the typical investment management fee you’d see with other options such as mutual funds, bonds, and stocks, annuity holders are also subjected to administrative and mortality fees. Should the original owner want to pull more than 10% out of the annuity account in a given year, he or she will be subjected to a surrender charge— another 7 to 12%. The IRS adds another 10% fee for early withdrawal if the recipient is less than 59 ½ years old.

Your invested money falls in tax-deferred status.
True. The tax deferral is frequently listed as one of the main advantages in holding a variable annuity. You won’t have to pay ordinary income taxes on any of your gains until your first payment is disbursed. However, there is no guarantee what tax rates will be in the future, and you may be paying more in taxes later instead of taking advantage of the lower rates now.

You’re giving your beneficiaries financial security.
It depends. One of the main advantages of a variable annuity is you can divide your assets among several beneficiaries upon your death. Beneficiaries need to be aware that in addition to money, they are inheriting your cost basis and are obligated to pay ordinary income tax. The money bequeathed to them could bump them up into a higher tax bracket, and raise their tax rate. In short, your good-intentions could end up costing them.

Benefits of Selling Your Variable Annuity
As an annuitant, you may feel trapped in a web of “legalese,” and feel as though their money is inaccessible. However, whether you’re the original policyholder or a beneficiary, you have options to sell your payments to a structured settlement company without incurring harsh penalties associated with early withdrawal or surrender. Learn more about how you can cash in annuity payments to a reputable company, like RSL Funding. Call us at web_phone to learn more or fill out the form for a free quote.