Variable Annuities - A Good Deal?

Q. Dear Jeff, what are the pros and cons of the #### High Five Bonus variable annuity? I have been offered a 5% bonus on a third of my total investments, and I understand that the guarantee does not lock in for 5 years? Is this true? Is this a good deal if I intend to retire and pull about 5-10% per year from the start?



A. As you can tell from the many articles that I have written about annuties, I am not a big believer in the 'benefits' they provide. A variable annuity is the insurance industry's way to compete with mutual funds. Back in the '80s there was a lot of money flowing into mutual funds and very little flowing into traditional annuities. The insurance companies saw this and came up with a way to try to get a piece of the pie--the variable annuity.

In its basic sense, a variable annuity gives you access to underlying mutual funds (they call them sub-accounts). To keep it from being a mutual fund product, the insurance companies had to have an insurance element so they put on a death benefit that guarantees your heirs will earn back at least what you put in should it be worth less than that when you die.

The fees associated with a variable annuity are considerably higher than those associated with investing in a mutual fund. In addition to the fees charged by the underlying sub-account manager, you also pay mortality and risk expense charges that normally are about 1.45% per year. Then they want you to add on all these other benefits that have additional charges and before you know it you are paying 2.5-3%+ per year in fees. That's a deep whole to have to climb out of each year.

The reason an advisor recommends a variable annuity is because he/she will earn more than if he/she recommends a mutual fund. In some cases, substantially more. Of course, they don't tell you how much they will make. They use some line like "You don't pay a commission, I get paid by the insurance company." If that's true, then why do you have years and years of surrender charges if you want your money back?

Likewise with the bonus' offered by these companies. There is no such thing as free money. Do you really think they will give you a 5-10% bonus on your money and not make it up through additional (sometimes hidden) underlying fees? You know they will! So what have you really gained?

I haven't recommended a variable annuity in years. There are just too many other low-cost, better performing options that don't tie your money up long-term and that don't force you to lose your flexibility.

Let me know if you have other questions or if I can be of further help.

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