With baby boomers beginning to enter retirement, it's no surprise variable annuity sales were up 16.7% in 2006, according to Insurance Information Institute. And it's a good indication that these types of products are becoming increasingly popular tools to manage personal wealth.
On the other hand, insurers are being challenged to offer more competitive products such as living benefits, while lowering costs to attract more sales. Although the market is improving its product diversity, there are a few basic things you should consider while shopping around.
All variable annuities, regardless of whether purchased through a bank or mutual fund, are essentially an agreement between you and an insurance company. This means the financial security of the insurer cannot be ignored. A financial rating can give a good indication of an issuer's financial health and is an important factor to consider.
Although variable annuities are placed in separate accounts from an insurer's general account and are not subject to claims by policyholders, a company with financial troubles can still impede policyholders from recovering their investments. This alone is a good reason to select a financially strong company.
Once you have found a well-rated company, you need to consider the costs, such as front-end loads, back-end loads (also known as surrender charges), mortality and expense risk charges, annual contract fees and optional feature fees.
Hit on the Front End
The front-end load is the commission you pay out of your investment contribution. It goes to cover sales costs, especially the fee paid to the salesperson who sells you the policy. For example, when you buy a variable annuity with a 4% front-end load, $4 of every $100 you put into the policy goes to the sales costs. Only $96 is actually credited to your account.
That's why TheStreet.com Ratings recommends only no-load annuities where there is no upfront reduction in your principal. You do, however, pay a slightly higher cost built into the mutual fund expense or insurance expense, which comes out of your earnings over time.
But since every penny you invest gets credited to your account, all your funds start working for you immediately. Good news: More than 97% of the variable annuities sold today have no front-end loads.
Just like the government will penalize you a 10% fee for withdrawing from your IRA before age 59½, insurance companies may attach a surrender charge representing a percentage of the contributions to the account or account value. Most surrender charges are designed to discourage you from making withdrawals during the first few years after you purchase an annuity.