Pros And Cons Of Variable Annuities
Regular readers will know I’m not such a big fan of variable annuities but I’ve gotten a few comments from readers that perhaps I’m a bit too harsh on them. To that end, I’ve compiled a list of the pros and cons of variable annuities in an effort to be a bit more balanced in my presentation of them. I’ve also written a fairly detailed post titled How To Use Variable Annuities The Right Way explaining a few specific circumstances where I think investing in a variable annuity really makes sense.
Pros of Variable Annuities
- Deferred taxation – You don’t owe anything until you cash it in
- (Often) some sort of guaranteed minimum return
- No contribution limits, unlike other tax-advantaged accounts such as IRAs and 401Ks
- You can choose to annuitize your account at retirement, guaranteeing an income stream for as long as you live with no tax consequences
- No Required Minimum Distribution requirements, which can be a big plus if you have a large estate or come from a long-lived family
- Ability to borrow against the value of your annuity (for a price)
- Include a death benefit, ensuring your heirs receive some minimum amount should you die early
- UPDATE: Annuities have certain positive asset-protection characteristics in some, though not all, states.
Cons of Variable Annuities
- Gains taxed as regular income and not at the lower capital-gains rate
- Subject to 10% penalty if you withdraw gains before age 59 1/2, just like retirement accounts
- Generally higher expenses than their mutual fund counterparts
- Often have confusing terms and are hard to understand for the average investor
- Value dependent on the claims-paying ability of the insurance company in question. If your insurer goes out of business, so does your money.
- Almost always come with significant surrender fees if you change your mind within a specified period, 7 years on average
- Death benefit usually far too expensive to be worth it, unless you happen to die fairly young