Q&A: What are the pros and cons of a variable annuity?

Question by Steve K: What are the pros and cons of a variable annuity?
My recently-retired parents have a lump sum of money (sizable but not huge) and have been recommended a variable annuity by a financial adviser. I have heard annuities are generally a bad investment because they have high fees, but a guaranteed return for them would be desirable. Can I get some pros and cons for a variable annuity in this specific situation?

Best answer:

Answer by Net Advisor
Pros:
1. Broker usually gets 5% commission on the sale.

2. “Growth” is tax deferred until withdrawn. Taxed at ordinary income levels on withdraws. 10% IRS penalty for withdraws if under 59 1/2.

Cons:
1. Insurance Company default risk. They are all in deep ca ca right now (AIG, AXA, AZ, HIG, ING, MET, etc..). I’d avoid them.

2. Long time 8-10 years back end load. Pay a penalty if take money out or move it elsewhere.

3. NO guarantees on investment performance, except fixed account which will not keep up with inflation. The “Guaranteed return,” typically a “GIC – Guaranteed Investment Contract” is ONLY guaranteed by the full faith and credit of the insurance company – not guaranteed by any government agency. Guarantee is void if company goes under.

If they tell you there are “fine, a strong company, how long they have been in business, their credit rating, etc., run! Look at their stock price! The only solid insurance co I know of is not public traded – USAA. (member restricted).

https://www.usaa.com/inet/ent_utils/McStaticPages?key=become_member_main

4. Annual BS “contract fee” changed by insur companies in addition to the fees charged by the funds in the annuity.

5. If their F/A has less than 15 year exp, or esp under 5 years exp, find someone else.

6. If their F/A only sells, or primary sells insurance products, works for a bank or insurance company, RUN! They don’t have the training, advanced licensing, or experience necessary to understand markets.

I have been saying since 1995 that banks and insurance companies are poor money mangers. Now we all know this.

I would rather put that money in a Roth IRA if the money they have is NOT from a 401(k) or existing qualified retirement plan.

I would be looking at FDIC insured short term (under 1 year, pref 3-6 months and roll them) CD’s, or Treasury Inflation Protected Securities (TIPS).

http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

I was insurance licensed since 1995, “retired” from this end now.

Know better? Leave your own answer in the comments!

Q&A: What are the pros and cons of a variable annuity?

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