What Are the Possible Risks with Variable Annuities
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What Are the Possible Risks with Variable Annuities

Several risk factors are associated with variable annuity, for example surrender fee, early withdrawal penalty and higher tax etc.

A variable annuity is a type of pension plan – which is purchased by a person from insurance company – is a bond between an insurance company and a person which is known as “annuitant”. There are two ways to purchase variable annuity: making a sequence of payment plan and single purchase payment plan. Under this agreement, the insurance company is liable to pay an intermittent amount to the annuitant. There are several investment plans under variable annuity. The value of investment is different from each other as it depends on the outcome of the investment plan. The better the performance of the plan, the higher the value of the investment would be.

Variable annuities are endowed in Money Market Instrument, bonds and stocks. They are invested the way mutual funds are invested, but still they are different from them. The risk factor associated with variable annuity is higher than mutual funds.

Risk factors associated with variable annuity investment plan

If the annuitant dies, his or her beneficiary is accountable to pay the entire tax amount due on annuity. If the investor (annuitant) withdraws the funds before the specified period, he is penalized, which is known as withdrawal tax penalty. This early withdrawal tax penalty is around 10% or more in some cases. In addition to this, normal income tax rates are applied on variable annuity gains. This is the highest risk factor associated with variable annuity because the tax amount payable on the gains of long term capital is less than the tax amount on variable annuity. Investors are not able to enjoy the benefits of the tax free compounding of variable annuities. If the investor has the accounts in nonqualified variable annuity then he has to pay more taxes in some states.

The risk of surrender fees with variable annuities

Another risk factor associated with variable annuity is surrender fees. Variable annuity is locked up to 5 years. If the investor wishes to withdraw part of invested amount or the entire amount, huge fines is imposed on him as penalty. Even though, the fine keeps decreasing each year, but the surrender fee for the first year is so high, this result in decreased benefits as the investor has to pay around 6% as the surrender fee.

Insurance fee and fund expenses are another risk factor associated with variable annuity, which makes annual payments more expensive for variable annuity. Investor should consider these risk factors associated with variable annuity before making any decision.

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Comments (2)

I plan to retire two years from today. I plan to put some of my retirement benifits in an investment plan. however,after reading your article, i am now thinking differently. Maybe a bank time deposit is better for this hard earned money.tho bank interest is lower than investments, it is still safer..aside, I will be investing for travel abroad to meet my son.what do you think,Sir Razmi? Please keep writing. Your article is very informmative and eye oppener.

This is one area where I need to educate myself. Thank you for a helpful article.