Sandra Reynolds, CFP® specializes in the financial issues affecting women and their loved ones.
Sandy has been a guest speaker and participant at the State Treasurers’ Money Matters Conference for Women in Massachusetts and Maine. She has also been quoted in articles for “Investment Advisor”, “Financial Planning”, and “The Journal of Financial Planning” magazines as well as appearing on WOMR 92.1 radio. She is a retired teacher and adjunct faculty for the College of Financial Planning.
Sandra Reynolds, CFP® welcomes clients from all walks of life with varying income and net worth levels. She offers clients a safe, relaxed and non-judgmental atmosphere where they can explore their values, goals and life plans.
Securities and Investment Advisory Services Provided through Capital Analysts Incorporated Member FINRA/SIPC.
Please feel free to contact Sandy at 508-636-6521 or visit www.reynplans.com
In this issue, I’ll explain variable annuities and how they work and in the February/March issue I’ll go into more detail about when you may want to consider an annuity and when you should not use an annuity. So here we go.
In the last issue, we talked about fixed annuities and how they work. To recap, annuities are financial vehicles that can be sold only by insurance companies. Basically, an annuity is a contract between you and an insurance company which promises to pay you a future income in exchange for the lump-sum payment or premiums (payments) that you pay.
In this issue, I’ll explain variable annuities and how they work.
What is a Variable Annuity?
Basically, a variable annuity (VA) is a combination of investments and insurance. The insurance coverage ranges from the traditional death benefit of life insurance to insurance guaranteeing that over a certain period of time, no matter what happens in the stock market, your money will grow (called a living benefit).
The investments, called subaccounts, act like mutual funds in that the insurance company pools the money from many investors and gives it to the investment advisor to invest according to the goal of the subaccount (growth, value, small company, foreign, etc.). The investments can range from very safe to very risky, just like the stock market.
What Does All This Mean?
Let’s take it one step – one benefit at a time.
Death Benefit A variable annuity has a death benefit like a life insurance policy. The death benefit could be as simple as this: your heirs get all the money back that you put in (minus withdrawals). Or it could be a little more complex, like getting a guaranteed return of 5% on your principal so your heirs get back the original investment plus the 5% interest earned on the contract. It could even guarantee that your heirs get back much more than you put in plus 40% more to help them pay any taxes due on the estate.
Living Benefits Many variable annuity contracts offer “living benefit” guarantees. They are usually tied to a waiting period before the guarantee comes into play. Let’s look at an example of a guaranteed minimum accumulation benefit that has a 7 year waiting period and guarantees that your money will grow by 5% simple interest at a minimum. So, if you put in $50,000 and the contract guarantees that your account value will grow 5% per year no matter what, as long as you keep the money in the contract for 7 years, then your guaranteed account value could not be less than $67,500 after the 7 year waiting period no matter what the stock market did.
Using the same example of $50,000, a guaranteed minimum withdrawal benefit would allow you to withdraw a fixed percentage (say 6%) of the premiums paid until 100% of the premiums paid had been withdrawn, even if the contract’s underlying investments were to lose money. So that would mean you could withdraw $3,000 each year until the money was gone or your $50,000 had been paid out, whichever takes longer.
A guaranteed minimum income benefit would ensure that when you are ready to collect retirement income payments, they would be based on a minimum payout guarantee no matter what happened in the stock market. Some variable annuities guarantee that your minimum payment can be based on the highest contract value you had over the course of holding the contract, even if the value has dropped because the stock market dropped.
Are Variable Annuities expensive?
That depends on what you are looking for in terms of guarantees. You will pay more for an annuity than you will pay for a mutual fund. Why? Because mutual funds are investments and they don’t have any guarantees. Variable annuities are both investments and insurance so you pay for both!
In the next issue I’ll review some of the pros and cons of annuities, including Indexed Annuities. See you then.
Securities and Investment Advisory products offered through Capitla Analysts Incorporated. Member FINRA/SIPC. This article should not be considered an offer or solicitation to buy or sell securities. Thsi article and the hypothetical example is for educational purposes only, to illustrate how the insurance guarantee works, and does not constitute investment, financial, tax or legal advice. Variable annuity products are not suitable for all investors. The availability of a rider is not primary reason to buy a variable annuity. The hypothetical illustration does not depict or predict actual performance of any variable annuity contract or investment choice. Any Insurance Guarantee depends upon the claims paying ability of the insurance company. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.