Variable Annuities' Warning List Grows

For example, to use some big round numbers: If you invest $100,000 in this type of annuity, you could get a guaranteed 6% rate of growth on your "protected withdrawal base." At the end of one year, that base would be $106,000, even if your stock market investment choices fell to be worth only $80,000. Next year, you're guaranteed to earn 6% on that base of $106,000.

On the upside, you get to a chance to make significant gains. If your stock market investments are successful, your investment account could be worth more than that guaranteed withdrawal base.

You have access to that actual market value at any time, assuming you're past the period of surrender charges. But the best use of these products is to take a withdrawal of no more than 6% a year (or whatever the guaranteed rate), thus preserving that protected withdrawal value.

You have access to all your cash at any time, once you're past the surrender charges. But the idea is to keep it growing at this minimum guaranteed rate, and hope your investments someday total more than that guarantee.

And that's what has the insurance companies a little worried these days. Many insurers are reducing the guaranteed rate to 5%, or even 4%, and increasing the annual costs and fees within the annuity.

As with all investments, you must never be blinded by the obvious rewards without understanding the costs and the risks. Tax-deferred annuities are not "chicken money" investments because of their costs, complexity, lack of immediate liquidity and lack of outright federal guarantees of insurance products. But they are worth a second look for investment capital, before some of the best deals disappear. And that's the Savage Truth.