The Risk Factors of Variable Annuities
All types of investments, at varying degrees, carry inherent risks. However, if you are aware of these risks, you will be in a better position to minimize them. If you are seriously considering a specific variable annuity plan, you should find out everything you can about that product prior to investing.
All information on a particular product is on a prospectus. Request one directly from the company that is offering it or through your investment advisor. Read it carefully. The document contains all important information about the annuity contract like charges, fees, investment or payment options, death benefits, and payout options, as well as your choices as to how you will get your money and interest returns back.
If you are looking at short-term benefits or have short-term goals, then variable annuities are probably not for you, because they are primarily designed to be long-term investments for retirement and other long-term objectives. Early withdrawals will mean higher charges and substantial tax assessments. Therefore, if you don’t have another emergency fund, you are taking a risk that in the near future, you will need a substantial amount of money and your only source is this fund.
Funds from this type of investment are typically placed in mutual funds. Because of its variable and sometimes volatile nature, you take the risk of losses if the fund in which your variable annuity is invested performs badly. You always have the option to withdraw, but then again, that would entail costs.
Also, the contract may provide for some other benefits like accident benefits and bonus credits. Remember that all benefits have corresponding charges. You will have to pay for each and every benefit offered. This is one of the reasons why it is very important that you read the contract and understand all of its provisions. If you really need the benefit, then find out if you can purchase it for less as part of the contract or on a separate plan like an insurance policy. If you don’t need it, you might want to request that it be stricken off the contract to lower the cost.
Bonus credit is a new feature that some insurance companies are now offering with variable annuities. The contract provides for bonus percentage added to the value of your contract. If you have an existing contract and are contemplating exchanging it for another annuity that has this feature, you should consider that a new surrender period will begin once you exchange your contract for a new one. This means forfeiture of your ability to withdraw from your account without being charged with substantial surrender charges. Surrender charges are typically higher on contracts with bonus credit provisions.
Variable annuities are best for long-term investing. You will give yourself the chance to reap bigger benefits if you hold on for the long term. If you intend to use the funds for your retirement, then this may be the right investment for you.
Investing in variable annuities carries an inherent element of risk. Account may lose value. Annuities are best suited for long term investors. Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax. Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if funds are not invested for a predetermined amount of time. Any guarantees are based upon the claims paying ability of the underlying insurance company.