Variable Annuity: Bad Investment!
Posted June 5, 2014on:
Recently I was approached by two prospective clients. The husband is a very successful entrepreneur and they are also very frugal. As the result of that, they have accumulated substantial wealth – north of $5mm.
The only problem? all of that money is in about 28 variable annuities they purchased over the years. In examining these variable annuities, I turned up the following problems:
1. Horrible returns
For each variable annuity, I was able to calculate its annualized return.
Out of the 28 variable annuities, only two have annualized returns above 4%. Seven have annualized returns between 3% and 4%. Six have annualized returns between 2% and 3%. The rest (13 of them) have returns less than 2% including a few that have negative returns. The average annualized return? 2.12%. Not enough to beat inflation!
2. Horrible surrender charges
There is this one annuity they purchased from Jackson National Life in 2007 for $200k; today it has grown to a “value” of $245k, but if they should cash it out, they would only get $221k since there is a surrender charge of $24k. After seven years, there is still a surrender charge of 12%! This is just horrible!
3. Horrible taxes
Let’s say they cash out the aforementioned annuity, they should still be able to pocket about $31k in gains right? Wrong! Unlike a mutual fund, where gains are taxed at the 20% capital gain rate, annuity gains are taxed as ordinary incomes. Since they are in the highest tax bracket, their combined federal and state marginal rate is about 50%. After tax, all they get from the annuity is about $16k in profit. This is a lot less than the insurance company took from them. Based on the size of the annuity and the lock period, it could be a lot less than commission the agent got as well!
How could they have put all of their money in such horrible products? Does it come as a surprise that they have a “good” friend working in the banking industry? These products are never bought, they are sold by people who have no qualm abusing your trust.
What about those guarantees?
These guarantees are not what they crack up to be! If you pay $100k in premiums, you are guaranteed to get $64k back. How does that sound? That’s exactly what’s in an annuity contract after I did the math.
You may not even get that, since insurance companies’ guarantees are as good as their balance sheets, which you should pray they don’t ruin like AIG did
If you want to find out how I can help you, schedule a Discovery review with me. If you are not ready, you can still get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.