Variable Annuities' Warning List Grows

Writing about tax-deferred annuities creates tremendous possibilities for misunderstandings and misleading uses of the information. So let me start with a series of warnings. Much like the label on your prescription medicine, these warnings inform you that the product within is designed to be a benefit, but only if you take it as directed, and avoid using it under the wrong conditions.

Here's the warning label for these tax-deferred, variable annuities:

• Purchase only through a reputable dealer, with expertise in these products.
• Purchase only from an insurance company with a strong financial balance sheet.
• Understand there is no official federal bailout fund for insurance companies -- only state funds that may "assess" other insurers in case of a company failure.
• Get a written explanation of all fees and charges.
• Use only if you understand "surrender charge period" and are sure you won't need access to your money before that period expires.
• Understand the risk of loss, as well what is, and isn't, covered by guarantees.
• Understand the difference between "withdrawals" and taking an "annuitized" stream of income.
• Understand what happens to the balance of your account if you die before taking out all your money.

Now, having read the warning label on the package, there are some interesting annuity products available in the marketplace. And some of the most generous ones are starting to disappear, as insurance companies reassess their ability to provide the returns they have been promising.

A tax-deferred variable annuity is a contract with an insurance company that lets you invest money for tax-deferred growth in a choice of mutual fund sub-accounts, which carry additional fees.

The value of your tax-deferred account depends on your fund investment choices within the annuity. The risk is that you make a wrong choice of investments and lose money.

That's why the industry has come up with a so-called guaranteed minimum income (and withdrawal) benefit. These protect your retirement income from bad investment decisions, at a cost and with some strings attached.

The guaranteed minimum income benefit provides, at an additional cost, protection against a market decline in the cash value of the variable annuity. That is, the insurance company guarantees a growth rate of 5% or 6% annually on the amount from which you will be able to withdraw income in the future. That "protected withdrawal value" is guaranteed no matter what the investment performance of your fund sub-accounts.