Guaranteed Annuities: Not So Ironclad?

You would think that a financial product known as a “variable annuity with guaranteed minimum return,” would offer returns that are, well, guaranteed.

That’s not always the case, however.

Confused? For an explanation, MainStreet turned to Jeffrey Voudrie, a Certified Financial Planner and president of the Legacy Planning Group, Inc. in Johnson City, Tenn., to discuss the ways in which these investment products can fail to live up to their promises.

MainStreet (MS): What do many investors think they’re getting when they purchase a variable annuity with an income guarantee?

Jeffrey Voudrie (JV): Based on the investors that I’ve talked to, they come away believing that they are guaranteed a specific return, regardless of what the market does, and that they can access all of it after ten years. If that’s what these products actually provided I would put most of my clients in them!

MS: How do these annuities fall short of expectations?

JV: It’s the unexplained "gotchas" that create the problem. Investors enter into these thinking that market performance isn’t going to matter. Often, however, if they need to get at their money during the accumulation period, or don’t comply with every single provision in their contracts, their true return is going to be based on market performance—less some hefty annual fees.

MS: What can cause the income guarantees to be terminated or become invalid?

JV: The guarantees on the contracts I’ve seen are nullified if investors withdraw any money during the accumulation period, which typically is the first ten years of the contract, unless they begin another ten-year period under the contract. Some guarantees also can be voided if investors take out more than their calculated annual payments during the distribution period.

MS: What steps, if any, can investors take to prevent a guarantee from becoming invalid or terminated?

JV: They must read and fully understand the entire contract. They have to read between the lines to decipher what the company isn’t saying and the impact it will have on them. They need to ask pointed questions of the insurance company. An example: Please provide, in writing, a list of every situation in which I would not receive the guaranteed amount.

MS: If the guarantee becomes invalid, what could the investor lose?

JV: If the guarantee becomes invalid, then investors’ entire return is going to be based on the market performance. Given annual fees of three to four percent on most annuities, the return is going to be considerably less than if they had invested in plain old index funds.

MS: Is there anything else that readers should know about guaranteed variable annuities?

JV: Investors have to realize that it is up to them to protect themselves. They need to approach this transaction much like they would approach buying a used car from a used car salesperson. The person selling the used car is doing so to make money and knows more about the car than you do. It’s the same with those selling annuities. The agent can make as much as a 10 percent commission getting someone to invest in an annuity—that creates a conflict of interest. Regardless of how nice the agent is, investors MUST do their own due diligence. If they can’t read the entire contract and understand it, they shouldn’t be putting their nest egg into it.

Related Stories:

What Are Annuities?

Saving for Retirement with Variable Annuities

The Pros and Cons Behind Annuities

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