Jason has been involved in the financial services industry as an advisor and financial educator for more than ten years. Prior to joining Pure Financial Advisors, Jason taught in the Financial Planning program at the University of Redlands and helped design a similar program at Grantham University. He is especially happy to see former students [...]

Variable Annuities can be complex and may be difficult to understand. What is annuity and why are some annuities variable? Pure Financial Advisors’ Financial Educator, Jason Thomas, CFP® breaks down what variable annuities are and what you should be aware of.

Concerns With Variable Annuities:

-Contract Fees
-Surrender Charges
-Mortality and Expense (“M&E”)
-Rider Chargers
-Tax Implications of Annuity Investing When Investing With Regular Taxable Money Outside of Retirement Accounts


Listen to the Your Money, Your Wealth® podcast episode on annuities

Video Transcript:

Variable Annuities are complex products that can be difficult to understand for some owners. We’re going to talk about some of the features today.

First off, what’s an annuity in general? The term just means a series of payments. But, an annuity contract with an insurance company is something that you use to provide income, either when initially purchased or in the future.

So, why are some annuities variable? That means it is an insurance product and an investment product. You own investments inside the account. Unlike other investments that you might buy, these investments are governed by certain features in your annuity contract. So, you might have a different experience than your neighbor next door who has the same annuity from the same company because of differences in age and different features and investments that you might have selected. So, it’s very important to read your entire contract.

There are some things in variable annuity contracts that you should be aware of and potentially look out for. One of the main concerns that many people have are the fees in variable annuity contracts. They can be very expensive products, so you want to make sure that the cost is justified for what you need. Some of the costs can include surrender charges, M&E expenses, which means mortality expense, management fees, rider charges for individual features that you select in the contract, or additional charges per transaction, or for annual maintenance. Make sure that you understand how these work in your contract. Another feature that many people want to be aware of is that there may be restrictions on how much you can invest in certain items inside the contract. Be sure to read yours specifically to see what those limitations are, if any, for you.

Another thing that people will want to be concerned with is the tax implications of annuity investing when they are investing with regular taxable money outside of retirement accounts. Know that your income when received will eventually be taxed as ordinary income, not investment income, and know that your beneficiaries will inherit your cost basis. They will not receive an adjusted or stepped up cost basis when you die.

These products may be a good fit for those who understand their contract, are willing to pay the cost, and whose specific needs are well met by the contract. But, everyone should look at their contract specifically and also consider alternatives to annuity investing, depending on what your needs are. Just make sure that you’re looking at all available options and choosing the best one for you.

Thanks for watching today and please come to PureFinancial.com for more information.

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