We covered some annuity questions earlier, but we didn’t fully address another type of annuity called the “variable annuity.” More people buy this than any other kind of annuity. Some items sell well because they are the best. Others sell well because a great deal of effort is put into the sale. This is a case of the latter.
The concept of the variable annuity is to invest money in the stock market, long term, without the risk of losing money. So let’s say you invest $100,000 in a variable annuity and hold it for 15 years. During that time, you would select various investments with the insurance company. These investments would return to you your $100,000, no matter what happens in the market.
Sounds pretty good, but what is the catch?
The main catch is the fees that impose a significant drag on your investment account. Often these fees exceed 3% per year. Therefore, over the course of 15 years, the compound effect of fees at 3% could decrease your account value by 50% or more.
If that weren’t tough enough to stomach, you have to become your own investment advisor by selecting your own investments from the menu of products offered. You are also responsible for monitoring your choices.
So why are variable annuities the best-selling annuity on the market? Maybe just “follow the money.” You see, variable annuities offer some of the highest commissions in the financial services industry.
Sometimes these products are a perfect fit, but you must examine the motives and alternatives behind the sales process of this product. We believe these are among the most oversold financial products on the market today. We also know that there are other ways to reduce risk and put together an investment plan that works as well or better than this one.