Variable annuities coming of age
- Michelle Wood: SWCD
- December 25, 2009
- 812
Please understand something before I get started. I am not an expert in insurance, investing or annuities. I also do not sell any of them.
I will try to discuss what they are in a very limited space and why they are growing in popularity.
Variable annuities provide a steady flow of a variable amount over a variable period. I know. That is a lot of variables.
Basically, you give the issuer a lump sum in exchange for a certain amount of income over a certain period of months/years.
An example would be if you gave an issuer a $100,000 lump sum in exchange for a promised $1,000 per month over a 10-year period or your lifetime or something in between.
The variable portions are the amount you get back. The more popular variable annuities give you a minimum guarantee. They might say you will receive an amount based upon a minimum guaranteed amount of five percent. If the market does better you will get more. If the market does poorly you still get a five percent increase as your return.
It’s that five percent minimum guarantee that most people like and that draws them into the variable annuity. When the stock market gets jittery, these variable annuities look better.
The downsides are that the variable annuities generally have a higher than normal administrative charge. That means that they take something off the top of the “return” before you get your increase.
Still, you get a minimum guaranteed stream of income and that is extremely popular with people who need that stream of income every month. The example that I used was just what I picked out of thin air so don’t think you can expect that kind of return if you go looking.
Before buying a variable annuity, find a very competent advisor. This is not easy to understand and many advisors know enough to be dangerous. Don’t ask me for the names of anyone because I will not provide it. Be careful. Be very careful.
Bill Weber, CPA, has been advising businesses for more than 30 years. He has served in leadership with Crown Financial Ministries and is a church co-coordinator for Financial Peace University.
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