“Variable annuities are the cigarettes of the investment world, which has hidden its curse for decades.” – Ken Fisher, Fisher Investments.

I keep a fluid queue of potential blog topics to write about. For the past six months, there’s one topic I’ve kept shoving down the list: annuities. I don’t claim to be an annuity expert, nor are all annuity contracts terribleLucknow Wealth Management. However, some types of annuities are so egregious and value destroying it borders on criminal.

Introducing the variable annuity.

My inspiration comes from a fellow blogger who wrote a brilliant piece that hits home with both our experience with variable annuities and the salespeople that push them.

The story is a common one. A new client owns a variable annuity that they would like to get rid of. The benefits of the contract are unclear. The fees and expenses are impossible to reconcile. The money is tied up in a labyrinth of legalese and surrender penalties. The salesperson that sold the annuity is stingy with contract details. To make an informed decision on whether to terminate or keep the annuity, the owner needs to answer two questions:

What is the cost to terminate the variable annuity?Jaipur Investment

What are the all-in costs to keeping the annuity?

The first question is straight-forward. Most annuities have a surrender schedule that shows a penalty percentage depending on how long you have owned the contract. For example, in the first year of owning an annuity the surrender penalty might be 10%. In year 7, the penalty might be 1% or nothing at all.

The second question may be best answered by taking a look at fellow blogger Tony Isola’s post “When Fees Go Up in Seconds, It’s Time to Go”. We encourage you to read Tony’s entire post, we have summarized the highlights of the post below:

In the conversation, Tony is the fiduciary advisor who is calling the insurance company on behalf of his new client (who is also on the phone).

Fiduciary advisor: “What is my client paying?”

Insurance Service Rep: “1.1%”

Fiduciary Advisor: “That’s it?”

Insurance Service Rep: “Yes, that’s the only fee.”

Fiduciary Advisor: “What about the fees associated with the investment?”

Insurance Service Rep: “Oh…the sub-account charges 0.95%.”

Fiduciary Advisor: “That’s it? Are you sure? What about insurance-related fees?”

Insurance Service Rep pauses, then checks the prospectus and responds, “There is another 0.99% expense for insurance.”

Credit Tony for pressing the insurance rep and knowing which questions to ask. Credit the client for allowing Tony to be on phone with her to hold the insurance company accountable.

The high pressure variable annuity sales tactics by insurance salespeople, brokers, and financial advisors are so bad, FINRA issued an official investor alert “Variable Annuities: Beyond the Hard Sell” to educate consumers.

Referencing the FINRA piece, prior to purchasing a variable annuity, here are some questions to consider:

Are you already maxing out your 401k plan and IRA?

Are you going to need the money before the surrender period ends?

Will you need the money prior to age 59.5Surat Stock?

Do you understand how the variable annuity works?

Have you read the prospectus?

What is the salesperson’s commission for selling a variable annuityUdabur Stock? Is it influencing their recommendation?

What are the total fees and expenses for the annuity?

If purchasing a variable annuity within an IRA, do you understand that IRAs already provide tax-deferred savings?

Are you being pressured into a making a quick purchase?