10 Things Life Insurance Agents Won’t Say: #4 Variable Annuities are Just Expensive Mutual Funds

Next up on the Market Watch exposé is a discussion about variable annuities, their expenses, complexity, and lack of any uniqueness compared to other investments options—or at least that’s what someone would like you to believe.

So…what’s the Problem?

It’s hard to say exactly what is wrong with variable annuities by reading this next installment since Mr. Goldstein never took the time to actual elaborate on why variable annuities are bad. Sure he laid out a few potentially negative things, but never closed the circle to specifically detail what’s wrong.

Instead, there’s a lot of highlighting the supposed high expenses and high commissions associated with variable annuities, and I guess we are just supposed to conclude that if the product has higher fees or potentially pays higher commissions to the person who sells it that is must be bad.

There’s also mention of consumer complaints, but not specifics regarding this. I guess suppose that simply having a complaint makes the product bad since, as we all know, none of the other investment options have ever upset a client.

Taxes…Gee…

There’s a comment about surrender charges that also mentions some buyers have complained about the taxes they found themselves paying as they began to use variable annuities for their income capabilities. I don’t know why taxes and surrender charges would be discussed in the same paragraph as if they were related (they are not), and I also am not sure why on earth someone would bring up the tax bill and act as though this is a specific draw back to annuities (it’s not).

This is, however, a great opportunity to trumpet a point that we’ve been talking about for years. Anytime one has money in an account that is subject to taxes once withdrawn, there is an important consideration to the impact taxes will have on what you’ve been able to accumulate.

Any annuity with a gain that is not held in a Roth IRA will have a tax liability upon withdrawal of funds, and most people seriously underestimate the impact of these taxes (i.e. the amount of taxes they will actually pay when they begin to withdraw the money). But none of this is unique to annuities. Traditional IRA’s and 401k distributions both come with tax liabilities. And since there is no basis on these products—you deducted the contribution from your taxes meaning you removed the basis—you’ll be taxed on the entire distribution. This also, also, doesn’t make either savings options bad, it simply means you have to understand what you are getting into.

Lower Expenses and…Fewer Features

This comment was laughable. Mr. Goldstein points out that some insurers offer no loan and/or low expense annuities, but these products come with virtually no benefits commonly found among annuity products. Meaning, those evil expenses you’ll pay actually accomplish something. No wonder these products are as popular as they are. Americans have evaluated what they have to offer and decided they are well worth the cost.

Has everyone decided they made the right decision? We all know the answer is no. But total variable annuity sales in 2013 were $143 billion (this number was quoted by Goldstein himself). That’s a lot of money and consistent with what the industry has been doing for years. In other words, there is a lot of money sitting in variable annuity contracts and if the majority of the people who put that money there were truly upset, the industry would be in major trouble. That’s simply not the case.


One Response to “10 Things Life Insurance Agents Won’t Say: #4 Variable Annuities are Just Expensive Mutual Funds”

  1. Daniel says:

    I used to poopoo (technical term) annuities in the past as I am a recovering Dave Ramsey follower (I still like much of what he says, but being in the industry has changed my viewpoint a bit). VAs are something that I am starting to work a lot with. I am big fan of the new low M&E, highly liquid annuities that have become popular recently. A large reason for this is that I am an IAR and like the ability to add advisory services to my clients. This often nullifies any benefit that comes from a income rider or other fringe benefit.

    Also, adding even a 1% advisory fee to fund with an M&E over 1%, an admin fee, fund expense ratio and you start to look at a drag on a policy that approaches 4% or higher. Having a flat fee or total fees under .75 make adding advisory much more palatable. It really is a nice way to help clients sock away more money without putting them in some sort of expensive and/or complicated product. On top of that, it is a nice way to build the advisory portion of your business.

    Really, if you have a complaint about a product means you and/or your advisor did not do the work necessary to find the right fit. In VAs there is such a variety and mix of features, that you should be able to find one that fits your need/want.

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