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Submitted by: Larry Greenberg
Todays well-informed consumer knows that many variable annuitieswith their high costs and complicated featuresare a confusing maze of smoke and mirrors. But today there are simple, low-cost annuities that can offer consumers a better value. Below are three common questions that I often hear about variable annuities.
1. Question: Will the steep cost of variable annuity insurance fees cut into my returns?
Fact: There are low-cost annuities designed to charge minimal insurance fees and preserve the value of tax-deferral.
Most variable annuities charge asset based insurance fees such as a mortality and expense (M&E) fee. The average insurance fees for a typical VA are 1.33 percent of assets annually, according to Morningstar data as of December 31, 2008. Critics are quick to point out that such fees can erode the growth of your portfolio over the long term, and these fees can reach thousands or tens of thousands of dollars each year in the case of affluent investors with substantial balances.
The good news is that there are now low cost variable annuities that charge far less, and products are constantly evolving to provide you with better value.
2. Question: I understand annuities sometimes can pay the sales person high commissions.
Fact: There are new variable annuities that do not pay a commission of any kind.
Most variable annuities pay the salesperson a commission, generally in the five- to seven-percent range. The commissioned salesperson is working for the company that pays them to sell the variable annuitywhich may result in a conflict of interest.
As Wall Street Journal columnist Jonathan Clements wrote, Variable annuities are a favorite with unscrupulous investment advisers, who can collect ridiculously high commissions by foisting these turkeys onto unsuspecting investors. 1
New no-commission variable annuities are designed with two important goals. First, no-commission VAs help keep costs low, so they can provide you with cost-effective tax-deferred accumulation. Second, no-commission VAs are perfectly aligned with the mission of fee-only advisors, who do not accept commissions from any of the products that they recommend, allowing them to uphold their fiduciary obligation to you and provide you with the most objective financial advice.
3. Question: Is it true that some death benefits riders can drain variable annuity returns?
Fact: There are simple variable annuities that offer a basic death benefit at no extra charge.
A basic death benefit can guarantee that your beneficiaries will receive the current contract value, typically without the delays of probate.
Enhanced death benefits, which are generally designed to hedge against market downturns or rising inflation, can cost you an additional 50 basis points per year or more. While some investors may believe an enhanced death benefit is worth the extra cost, these insurance fees can cut into your returns.
If your objective is efficient wealth transfer, you may want to look at other possibilities. For example, if you are insurable, a term-life contract may be a more cost-efficient alternative. Unlike variable annuity assets, life insurance is not subject to ordinary income taxes when passed on to beneficiaries.
1 Defending a Much-Maligned Investment: When Variable Annuities Make Sense, Jonathan Clements, Wall Street Journal, October 20, 2004
About the Author: Laurence P. Greenberg is President and CEO of Jefferson National, which developed Monument Advisor, the first flat insurance fee variable annuity. See the impact fees and charges may actually have on your savings by taking the challenge at
. For more information or to receive a prospectus, visit www.jeffnat.com or call 1-866-WHY-FLAT (866-949-3528).