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Variable Annuities: How Good a Deal?
- April 19th, 2004
The very people who should be avoiding variable annuities are buying them like hot cakes, according to a recent article in the New York Times.
Sales of variable annuities, an investment vehicle created by the insurance industry, have been taking off, jumping 10 percent last year, to $126.4 billion. The reason for their attractiveness is that they allow normally risk-averse investors to venture into the stock market with a safety net in the form of some insurance protection.
But the fees on variable annuities are steep compared to mutual funds. This means that investors need to keep their money invested for at least 12 years and preferably for two or three decades. And there are penalties of up to 17 percent for early withdrawals.
Meanwhile, the insurance features are often more psychological than financial, say some analysts, and the products can be highly complex.
Insurance agents earn high commissions selling variable annuities and the products have sometimes been sold to people who should not have bought them. This includes those who could not safely tie up their money for many years or those in their 70's and 80's who predictably might die before realizing the benefits of their investment.
Financial planners say the best time for people to invest in variable annuities is in their 30's and 40's. But the National Association for Variable Annuities says most customers are in their 50's and 60's. And while financial planners say that wealthy people are likely to benefit most from variable annuities, most variable annuities customers earn less than $75,000 a year.
To read the full article in the New York Times, go to: http://www.nytimes.com/2004/04/13/business/retirement/13TREA.html
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Last Modified: 04/19/2004