The variable annuity is really just an option to use mutual fund type of investments within an annuity. Depending upon the choices used within the annuity, the account value can be very risky if stock mutual funds are used or fairly conservative if bonds funds are used.
There is no doubt variable annuities (VA’s) can have high fees and this has raised a lot of red flags throughout the financial services industry today. Normally all VA’s have an annuity fee that ranges from 1 to 1.5% per year, with around 1.25% being the average.
Also the majority of VA’s will also add riders of some type, either death benefit or income riders, which can add an additional .75% to 1.5% per year as well. Add the typical mutual fund fee of 1% or more, and you can see that a VA fee can very quickly run 3 to 4% per year. This can really diminish the growth potential of a Variable Annuity.
Since the money in a VA is in a mutual fund type of investment, an investor can lose money if a market correction does occur. Proper asset allocation which reflects each person’ risk tolerance needs to be addressed so that the allocation mix matches the investors desire for risk.
The majority of all VA’s do have a death benefit that will guarantee the deposit at death, regardless of the actual market value. This is one benefit that a VA has over just holding mutual funds. Also if a death benefit rider is chosen as well, there can be some guaranteed growth at death regardless of market performance.
The Variable Annuity originally designed the Guaranteed Withdrawal Benefit or Income Rider, but today the Fixed Index Annuity can offer significantly higher guarantees and higher payouts since the account value can never go down due to market risk.
The VA really doesn’t have a lot to offer for the investor. If they want maximum growth, mutual funds will save the investor a significant amount with much lower fees. If it is a guaranteed income that is the goal for the investor, the Fixed Index Annuity can offer significantly higher guarantees and higher payouts.
Hopefully this summary on annuities helps you to see the different types and how important it is to look at each one and the context they are designed to be in for the investor.