The One Reason Why Variable Annuities Are Almost Always A Bad Idea

Financial advisors love to sell variable annuities. The reason is simple—commissions of up to 8%. If a financial advisor can sell you a $200,000 variable annuity, that means commissions of up to $16,000. Not bad for a day’s work!

Unfortunately, commissions are just about the only thing that is simple about variable annuities.

The one reason why variable annuities are almost always a bad idea is that they are too complicated for ordinary investors (and normal people in general) to understand. Seriously, have you ever tried to read a variable annuity policy? Here is just one example from an actual policy. Try to stay awake through this, because there is a lot more you urgently need to know about variable annuities:

On the first Policy Anniversary the Interest Credit under Option D equals (a) x (b) x (c) where:

  • (a)Is the Option D Annual Index Change Rate for the first Policy Year.
  • (b)Is the Percentage of Premiums for the first Policy Year as shown on Page 3 of the Policy times the sum of the Initial Premium and premiums received after the Policy Date an on or before the 20th calendar day following the Policy Date.
  • (c)Is the Interest Credit Allocation Percentage for the first Policy Year for Interest Credit Option D.

Doesn’t that make you want to read more about options A-C? By the way, even if you read this section closely—and you were a genius—you still wouldn’t know what it means. Did you notice all of the capitalized terms? For example, to know what the “Annual Index Change Rate” is, you would have to look it up in the variable annuity’s list of defined terms.

The fact that variable annuities are incredibly complicated has three particularly nasty implications. First, your financial advisor might not understand your variable annuity either, which should terrify you. Second, your variable annuity is probably stuffed with hefty costs and fees that drag down performance. Third, you might not be getting any of the tax benefits promised by financial advisors either. In fact, investing in a variable annuity can actually be a bad tax move.

  • 1)Your financial advisor might not understand what he or she is selling to you. You don’t have to go to college to be a financial advisor, so it shouldn’t be a surprise that, if variable annuities are too complicated for normal people to understand, they are too complicated for many financial advisors to understand, too. Financial advisors and insurance agents are salespeople, not math professors.
  • 2)Your variable annuity is probably stuffed with fees that will result in underwhelming performance. Financial advisors promise that variable annuities provide stock market exposure with downside guarantees. What they don’t tell you is that those guarantees can be very expensive. Then there are administrative fees, fees for management of the sub accounts an investor selects, mortality and expense risk charges, and other miscellaneous fees. While the stock market over time typically returns 7-8% annually, variable annuity fees can go as high as 5%, leaving just 3% for you, the investor. This is less than many simple, traditional bond funds earn. So much for stock market returns!
  • 3)Like vehicles in your side view mirror, tax savings are not as large as they first appear. Financial advisors will tout the fact that your variable annuity accumulates tax-deferred, but this tax deferral is often not worth the expense, fees, and commissions that a variable annuity charges. However, if your variable annuity is sitting inside an IRA, there is no additional tax benefit. Individual retirement accounts (IRAs) already allow your investments to grow without taxes taking a bite out of your earnings every year. A variable annuity inside an IRA is not a belt and suspenders approach—it is like wearing two belts, something sensible adults just don’t do.

When your financial advisor is describing a variable annuity, they may be dead wrong about how the annuity works. As just one example, I recently spoke with a client whose financial advisor promised him that a variable annuity would pay at least 6.5% annually, when, instead, the annuity stated that the maximum it would ever pay was 6.5%.

Even worse, switching your investments to a variable annuity can actually increase your tax bill, depending on your tax bracket. That is because gains on most investments are taxed at the capital gains rate, while profit from a variable annuity is taxed as ordinary income. If your income tax bracket is higher than the capital gains rate, switching to a variable annuity can actually increase your tax bill. Did your financial advisor confirm that your tax bracket is lower than the capital gains rate, or did he skip this step in racing toward his big commission payday?

Right now, you might be thinking that you would really like to sell your variable annuity. Here’s the catch: you probably can’t get out of your variable annuity without paying hefty surrender charges, which can be as high as 15%, and last as long as twelve years after your initial investment.

Most investors holding a variable annuity have two, unappealing options. First, they can stay in their variable annuity and get dismal investment returns for the foreseeable future. Second, they can pay thousands of dollars to withdraw their money and invest elsewhere. Either option is painful.

Investor Defense Law LLP is a law firm that gives investors a third option. If you have been bamboozled in buying a variable annuity that isn’t working out for you, we will review your policy and listen to your story. If we believe you have a claim against the insurance company that sold you your variable annuity, we will go to bat for you to get your insurance company to waive your surrender charges and provide whatever other relief is appropriate.

To contact an annuity lawyer at Investor Defense Law LLP, give us a call at 800.487.4660, or visit us online at

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