Kind Words About Variable Annuities

I’ve been among those critical of variable annuities over the years. Many of them have high fees and expenses, plus they convert tax-favored capital gains and dividends into ordinary income. But there’s something different about many variable annuities sold in recent years. After the stock market crash following 1999, insurers have to sell something more than tax deferral to sell VAs. So, they came up with guarantees. Many of the VAs sold since the early 2000s guarantee lifetime withdrawal rates or have similar guarantees. The result is guaranteed income and principal protection, something most people need as part of their nest eggs. You can read kind words about former VA critics here and here. The second link argues that insurers are pricing the guarantees too cheaply, creating a great deal for insureds. Or at least they were pricing cheaply at the time of the paper. A hat tip for these articles to this link, which is a good general discussion of the issue.

The question is whether those guarantees are worth the cost. In particular, if you’re considering a VA with a lifetime income guarantee, you also should consider buying an immediate annuity instead at retirement or buying either an index annuity or fixed deferred annuity now and converting it to an immediate annuity at retirement. A VA with guarantees carries a lot of costs. You need to work with an independent insurance expert to determine which policy’s guarantees are the best value for you.

Fisher’s claims are at odds with a growing body of empirical research published in peer-reviewed academic and professional journals.

At the heart of the issue is that, in his anti-annuity magniloquence, Fisher neglects to disclose that nearly 90% of all variable-annuity contracts issued over the past decade or so have a rider feature that offers the contract owner some form of a lifetime income guarantee – something no traditional money-management firm or mutual fund can provide. Since these guarantee features first came into vogue in the early 2000s, researchers have sought to determine whether they truly add value to consumers or whether they are merely marketing gimmicks for generating revenue for commission-hungry sales reps and greedy insurance companies.