Pitfalls of Variable Annuities
The guy that’s about to make a fat commission from selling you a variable annuity probably won’t tell you about the often overlooked pitfalls of this complex financial product.
A variable annuity is effectively a mutual-fund account wrapped inside an insurance policy. It consists of three parts: (1) a general account, (2) subaccounts, and (3) a death benefit.
Larry Swedroe elegantly summarizes the disadvantages of variable annuities in his book “Investment Mistakes Even Smart Investors Make and How to Avoid Them.”:
- the high cost of the insurance
- the high operating costs of the investment accounts
- the lack of passive low-cost investment choices
- the conversion of preferentially taxes capital gains into highly tax ordinary income
Think carefully before buying a variable annuity. If you feel you truly need this product, look for one with lower cost structures and better investment choices such as those offered by AEGON, Schwab, TIAA-CREF and Vanguard.