If you own a variable annuity, no matter the quality of the company that issued the contract, the primary question you should ask is: “What is the best option on my variable annuity for me going forward?”
Those various options generally include:
- • Keeping the annuity as is.
- • Keeping the annuity but changing the investment lineup.
- • Exchanging the VA for a new one with no commissions and lower ongoing fees.
- • Cancelling the contract and getting your money back.
- • Start taking income under a guaranteed rider.
The best answer is not easy to know. The correct answer for you and your situation will require insight from an objective expert that has no vested interest in the outcome. The person who sold the annuity to you in the first place is not objective and should not be the person to consult for an independent review!
If you own an annuity, getting it reviewed will help you to understand the best options for you and your particular contract, and can be dependent upon a number of different factors including:
Better Understanding of the Contract
More than any other financial product, commissions on annuities are among the highest that a salesperson can “earn.” Because of that, some salesmen may intentionally give you the Readers Digest condensed version of the annuities contract rather than a full explanation, or he or she may omit important details and/or overstate possible returns. Getting an objective second opinion will allow you to more clearly understand your particular contract.
Contract Structural Issues
There may be structural issues to the contract such as ownership and beneficiary designations, which might need to be looked at. Some contracts are first to die on a death benefit while some are second to die. Another issue to consider is can the guarantee be continued by a surviving spouse?
If a contract allows for a spousal continuation, the spouse must be the primary beneficiary in order to take advantage of the guarantee. Unfortunately, I’ve encountered a number of cases where people have had estate planning done and changed the primary beneficiary on the accounts, which would not allow the surviving spouse to continue receiving the protection.
Variable annuity contacts have various guarantee riders issued for the policy, all of those at various costs. Based on the investments selected there may be too little growth to pay the fees in which case you may want to look at more growth-oriented positioning of the portfolio to get better value from the guarantees.
If a client is changing investment options, they must make sure that this is an approved investment option and will not disqualify the guarantees. Some contracts require a “model” and if you move out of it would negate the guarantee.
Some contracts don’t allow you to go into the most aggressive investments as it would negate the guarantee while others, interestingly, don’t allow you to go into conservative investments like money markets or short-term bond funds. I see both ends of the spectrum there and it varies from contract to contract and company to company.
Due to the complex nature of variable annuities, it may be difficult for an investor to determine the possible tax consequences without the help of a financial professional. For example, and particularly with non-qualified contracts, there can be a significant tax difference between doing a systematic withdrawal versus an annuitization.
If there is no gain, it would be principal first and wouldn’t be taxable so the same contract could have different consequences for someone taking withdrawals. Annuitization has an exclusion ratio. Often income decisions such as distributions may be irrevocable. For qualified retirement accounts such as an IRA, there could be some very valuable tax strategies like Roth conversions that can provide additional value on the guarantees.