CD Better Than Annuity?

Q: Mr. Voudrie,

A local banker sold my then-83-year-old Dad a variable annuity with The Hartford insurance company. This was in May of 1999. My Dad is now 91 and we children are looking out for his investments. I personally believe this was an unwise (should I say "stupid"?) move on the banker's part vis a vis my Dad, although a "deal" for the banker. (I am currently talking with the banker.)

The annuity is in the... Advisors Fund with The Hartford and is managed by Wellington, which is a subsidiary of the Vanguard Group. Wellington invests this fund using a 75% equities, 25% bonds strategy (as far as I can determine). The fund has had a fine ride on the market rollercoaster over the years, dipping some $14,000 in value at one point during the October 2002 slide/crash, although enjoying a semi-acceptable upturn in early to mid-October of 2007.

This is a non-qualified annuity. Also, my Dad has never annuitized it, only drawing out a small portion 3-4 years ago. Frankly, I think he would have been better off in a simple and safe CD, money market account or fund, or mutual funds. The annuity's 2-year change is 3.23%. Overall, since purchase, the annuity is doing about 9-and-a-half percent. Sorry to go on so long, but what would your advice be to me and my siblings? Thanks for your time! Enjoy your column!

A: You know that I generally am not a fan of annuities because I don't like the high fees and the long surrender periods. And there is some concern over your father's age when he purchased it. Even then, though, if it was a small portion of his investable assets it may have made sense.

Remember what was going on in the markets back then...

I'm very familiar with Hartford, Wellington management and the Advisors fund. As far as variable annuities are concerned, I would rank this one pretty high. Believe me, he could have done much, much worse.

I also disagree that he would have been better off in CDs over the same time period. Interest rates have been very low the last 6 years. If he was in a one-year CD, he likely would have had years in which he was only earning a couple of percent. Averaging 9 1/2% a year is good, considering the markets.

The death benefit on variable annuities makes them a little more 'friendly' as well. At his death, you and your siblings will receive the current contract value or the death benefit, whichever is higher. You can take it in a lump sum. Taxes will have to be paid on the gains, though.

The real question is what to do now. It sounds like his surrender period is up so there wouldn't be a penalty. If he is concerned about the market and wants to get rid of any fluctuation, then he might consider moving it to a Certificate of Deposit. If he's not too concerned, and this is only a portion of his investable assets, then he may decide to keep it where he is.

One good thing, because of his age he no longer qualifies for an annuity so he doesn't have to worry about agents trying to get him to move his money from one to another.

Your posted comments on this and other questions are welcome.
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