Variable Annuities: What is a Variable Annuity?
By Jorge Hiram Garcia, Your Insurance Advisor | May 21, 2010
A variable annuity is a type of annuity that resembles a mutual fund. A variable annuity provides a consumer with some of the safety that a regular annuity provides, but offers a rate of return that can vary dependent on what happens in the market. In order to determine the rate of return, the annuity buyer selects from a variety of investment portfolios called sub-accounts. These portfolio choices are very much like those offered for mutual fund families and can range from those offering ultraconservative growth to aggressive growth.
The important things to keep in mind when considering a variable annuity is that a variable annuity, in contrast to a fixed annuity, offers no set rate of return. In other words, it offers no guarantees to annuity buyers, but promises a better rate of return in case the markets perform better than expected. That promise is the hook that financial planners and investment advisers use to get consumers to buy variable annuities. The thing is that just like a variable annuity can receive a greater rate of return when the market goes down, if the market falls, the variable annuity can lose value, and because it is an annuity, they can be hard to get out of so the losses suffered by annuity owners can be worse than those with other types of accounts. It is important to recognize the difference between fixed products which protect annuity buyers with guarantees, and variable annuities which do not protect annuity buyers.
In general, variable annuities are bad for consumers, and are generally the source of the bad reputation that annuities typically enjoy in the news. Almost anytime annuities get bad reviews or bad press, the source of the bad news are variable annuities. The reason variable annuities are not as effective for consumers is that they offer none of the advantages of a mutual fund, and none of the advantages of annuities, yet are touted as the perfect combination of both of these types of products.
Variable annuities are generally marketed and sold by investment advisors and financial planners. Insurance agents typically sell fixed annuity products that are safer and more geared towards protection and safety than variable annuities. it is important to keep that fact in mind when shopping around for an annuity product. Annuities are generally a product that is purchased for safety and guarantees. Do not purchase an annuity for the promise of higher rates of return. You’ll be better off purchasing an other type of investment product if that is what you are after.
Stay tuned for additional articles about annuity products in the coming days.
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