Variable annuity:should we discard it altogether?

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PostPosted: Fri May 08, 2009 10:19 am   Post subject: Variable annuity:should we discard it altogether?  

After reading some of the scary stories on this board itself I’ve become more interested in knowing about the variable annuity plan. I question is, should we altogether discard this financial tool or someone young can still benefit from investing in variable annuity plan?


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PostPosted: Fri May 08, 2009 11:02 am   Post subject:   

Quote:
...or someone young can still benefit from investing in variable annuity plan?


Investing is the operative word.



A Variable Annuity IS AN INVESTMENT.



FIXED ANNUITIES and FIXED INDEXED ANNUITIES are safe money saving instruments.



If you understand the difference and the RISK to your principal, then there is nothing wrong with a VARIABLE ANNUITY.



Question:

However, if you wouldn't sell your Mother the contract or want to be the beneficiary on the contract then who would sell the policy?



Answer:

Bernard Madoff


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PostPosted: Fri May 08, 2009 12:06 pm   Post subject:   

I think Gary that aggressive players would still prefer variable annuity over the fixed ones. There are chances that you may get greater annuity return depending upon the performance of the market with a variable annuity, whereas, the annuity income is fixed over the period with the fixed annuity plans.

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PostPosted: Fri May 08, 2009 3:37 pm   Post subject:   

In case of variable annuity plan, Understanging of market & its trend is required. More over it needs frequent market analysis & so time consuming. But it gives higher return.

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PostPosted: Fri May 08, 2009 9:00 pm   Post subject:   

Quote:
After reading some of the scary stories on this board itself I’ve become more interested in knowing about the variable annuity plan. I question is, should we altogether discard this financial tool or someone young can still benefit from investing in variable annuity plan?




The key part of your question is calling a variable annuity a "financial tool". As such, it is neither good nor bad. It is appropriate or inappropriate based upon the situation.
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PostPosted: Sat May 09, 2009 10:08 am   Post subject:   

Quote:
As such, it is neither good nor bad. It is appropriate or inappropriate based upon the situation.




I guess that is what the OP wishes to know. Expert, according to you who are the best canditate for the variable annuity.

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PostPosted: Sat May 09, 2009 10:32 am   Post subject:   

Quote:
I guess that is what the OP wishes to know. Expert, according to you who are the best candidate for the variable annuity.




Okay, though the experts would certainly comment on this aspect I'd throw in my 2 cents anyway, IMO variable annuity would better suit people who are still at their 40s. Early starters can gain from buying variable annuity plans as their money would grow in the account tax free. People, who are close to their retirement age should refrain themselves from purchasing variable annuity.



~Jeremy
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PostPosted: Sat May 09, 2009 11:43 am   Post subject:   

First of all, it depends upon whether we are talking about qualified or unqualified money. Qualified money is when the variable annuity will be in an IRA. Unqualified money is when the variable annuity will be outside of an IRA.



Typically, one will read that variable annuities should not be used for qualified annuities because the investment is already tax deferred. When you read that, look at the background of the writer and I can guarantee that the writer is not an expert on the subject of annuities.



Non-qualified annuities:

Advantages compared to mutual funds:

1) Grow tax deferred

2) Can have guarantees

3) Ability to move money between sub-accounts without taxation.



Disadvantages compared to mutual funds:

1) Penalties for use before 59 1/2

2) All growth taxed as income and not capital gains

3) Gain comes out first

4) No step up in basis at death

5) Usually higher costs



Qualified annuities:

Advantages compared to mutual funds

1) Can have guarantees



Disadvantages compared to mutual funds

1) Usually higher costs



In short, I think that the disadvantages usually outweigh the advantages for non-qualified annuities. Very seldom do I think that they are appropriate. The following fact pattern would need to exist for a non-qualified annuity to make sense:

1) No desire to leave money behind at death

2) Expectation of being in a high tax bracket today and a low one in the future

3) The guarantees allow a conservative investor to invest more aggressively

4) No chance of needing the money before age 59 1/2



For qualified annuities, they make sense if the investor feels that the guarantees make up for the higher costs.



In short, non-qualified annuities are rarely appropriate while qualified annuities are often in many cases.

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PostPosted: Sat May 09, 2009 1:48 pm   Post subject:   

Hi Jeremy,



Quote:
IMO variable annuity would better suit people who are still at their 40s.


Would you suggest people in their early 30s to invest in such things? I'm asking since people in their 30s would have better risk-taking abilities. I just wanted to make sure that I'm not missing out on anything!

BarbieL

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PostPosted: Sat May 09, 2009 3:08 pm   Post subject:   

Barbie,



The younger age allows one to certainly take more investment risk. However, at the same time, the increased costs of the variable annuity can have a dramatic impact on performance over a long time period.

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PostPosted: Mon May 11, 2009 10:19 am   Post subject:   

Quote:
I just wanted to make sure that I'm not missing out on anything!




You would if you don't read the fine prints as well as between the lines of the annuity agreement. As Expert has mentioned, young age would allow taking more risks but one can't give a ruling that variable annuity is going to suit all the youngs below 30 years. Choice of the plan would largely depend upon the risk taking ability and financial condition of the buyer.

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PostPosted: Tue May 12, 2009 11:54 am   Post subject:   

Hi Expert,



Quote:
However, at the same time, the increased costs of the variable annuity can have a dramatic impact on performance over a long time period.




By 'impact on performance' do you mean the effect on returns?

BarbieL

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PostPosted: Wed May 13, 2009 1:30 am   Post subject:   

Quote:
By 'impact on performance' do you mean the effect on returns?




Yes. Let me make up an example for you. Joe and Jill are both 30 and have $100,000 to invest. Joe puts the money into a bunch of growth stocks. Jill puts the money into a variable annuity. The VA has total expenses that are 1.5% higher than the mutual fund. The subaccounts that Jill chooses perform identically to the stocks that Joe picked. This means that if Joe got an 8% return, Jill got a 6.5% return.



What are the results at age 60 before selling the investment? Joe has $1,000,000. Jill has $660,000. If this is non-qualified money, Joe will pay capital gains tax and Jill will have to pay income tax.



What if they both die. What is the impact after their beneficiaries get the money? Joe's kids will get $1,000,000 with no taxes. Jill's kids will have to pay income tax on a $560,000 gain. Joe's kids will have twice as much money at death.



Playing around with the numbers will change the numbers, but it won't change the conclusion.



If one is paying more to own a VA, there needs to be a reason to do so. Tax deferral for a VA under current tax laws is a negative and not a positive.
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