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Last year the people making my taxes suggested a variable annuity instead of my traditional IRA. This variable annuity was supposed to guarantee 8% return year after year with no exception or market value whatever is higher in every period.

It was too good to be true, and I did not have time to research, so I decided to pass in the offer and go with the known IRA account.

Now I am back thinking of the sure business, and I am wondering what kind of people buys Variable Annuities. Just to see if I fit this profile.

Thanks for your help, and to the "Personal Finance and Money" people, Thanks!

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    This comes up often, we should make the best answer our tag wiki
    – MrChrister
    Nov 9, 2010 at 5:02

4 Answers 4

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An annuity makes sense in a few different scenarios:

  • You need life insurance, but are not insurable. Annuities can come with death benefits and even income streams after your death. The insurance is essentially secured by your lump sum payment.
  • You have a lump sum at retirement and have no confidence in your ability to manage your money.
  • You have a lump sum at retirement or for a dependent and have no confidence in your spouse/dependent's ability to manage an income stream or heed informed advice.
  • You have a marginal retirement nest egg and an expectation of an exceptionally long lifespan. (Annuity payments are tied to your death.)
  • You have alot of money and need a tax shelter for future growth.

In general, they are not the best deal around (and are often ripoffs), and will almost certainly be a bad deal if pitched by a tax preparer, insurance salesman, etc.

Keep in mind that any "guarantees" offered are guarantees made by an insurance company. The only backing up of that claim in the event of a company failing is protection from your state's Guaranty Association. (ie. not the Feds)

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  • @duffbeer703 - For VAs, is the "life insurance" real, or is it insurance to offset account losses? i.e. the payoff maximum is just the amount of market drop since the last peek? Of course there are moments when this is important, but it seems the average payoff is 20-30% tops, with the rare tail closer to 50%.
    – JTP - Apologise to Monica ♦
    Nov 12, 2010 at 20:16
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    Explain the tax shelter? This would be for those who will retire in a lower bracket? But a few years' fees wipes that out, no? (Sorry, just found comments time out in 5 minutes)
    – JTP - Apologise to Monica ♦
    Nov 12, 2010 at 20:24
  • All of the features in an annuity policy are riders, and some of these riders let you defer the annuity payments and withdraw them at a later date -- you don't pay taxes on the unrealized gains in the contract.
    – duffbeer703
    Nov 12, 2010 at 21:46
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    @JoeTaxpayer Annuities are really the inverse of permanent life insurance. The payments are generally "payments for life" -- so if you die early, you are effectively negating your gains. That's assuming you stick with it... As with most life insurance products, the business model assumes that many customers will withdraw early. (which they do)
    – duffbeer703
    Nov 12, 2010 at 21:54
  • @duffbeer703 - set me straight, the life insurance part of a VA - is it above thew account value, the last account high value, or something else? The last VA prospectus I read implied that what was insured was any loss since the last valuation, nothing more.
    – JTP - Apologise to Monica ♦
    Nov 14, 2010 at 15:48
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Two types of people:

(1) Suckers

(2) People who feel that investment advisors/brokers make too little money and want to help out by paying insane commissions.

Think I'm kidding. Check out this article: "Variable Annuity Pros and Cons"

Seriously, for 99% of us, they are a raw deal for everyone except the person selling them.

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  • Hi John. Thanks for your response and the blog post. I understand the point of the blog post, but I am still confuse, of why would someone not pay 2-3% for guarantee 8% or more year after year. That still sounds like a deal that is too good. Maybe I am missing something?
    – Geo
    Nov 10, 2010 at 4:08
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    Because once you factor in the fees, you could likely get a much better return with just about any other investment. Plus the lock-in an variable annuities is especially unattractive. Think of it this way. I've heard of firms giving brokers trips to Hawaii for selling these things. There is clearly a big upside for the investment company, and with every upside there has to be a corresponding downside. That's where you as the investor come in...
    – JohnFx ♦
    Nov 10, 2010 at 15:46
  • Hi John, This has been my broad suspicion for a while.
    – chrisfs
    Jan 25, 2011 at 2:34
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There is always some fine print, read it. I doubt there is any product out there that can guarantee an 8% return. As a counter example - a 70 yr old can get 6% in a fixed immediate annuity. On death, the original premium is retained by the insurance company. Whenever I read the prospectus of a VA, I find the actual math betrays a salesman who misrepresented the product. I'd be really curious to read the details for this one.

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  • While I agree that you don't find many with such high returns, I had a Pacific Life variable annuity that offered a guaranteed 10% growth on the deferred side for 10 years. As alluded to by the OP, that was the base return and if the market outperformed, you got the higher of the two. Since it did indeed outperform, when the 10 years was up and the guarantee was done, I did a 1035 exchange into another one). Pac Life no longer offers guarantees that high. I wonder why? :->)
    – Bob Baerker
    May 4, 2019 at 16:22
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I wrote a detailed answer about variable annuities on another question, but I want to include one specific situation where a variable annuity may be the right course of action. (For the sake of simplicity, I'm quoting directly from that answer):

Three-quarters of US states protect variable annuity assets from creditors. Regular IRA's don't benefit from protection under the Employee Retirement Income Security Act (ERISA) and may therefore be more vulnerable to creditors.

If you're a potential target for lawsuits, e.g. a doctor worried about medical malpractice suits, variable annuities may be an option for you. As always, you should consult a legal/tax professional to see if this might be a good option for you to consider.

The SEC also has a fantastic publication on variable annuities that provides a great deal of information. It's not directly related to this question because it doesn't necessarily focus on the circumstances in which they might be a good fit for you, but it's educational nevertheless and should give you more than enough information to properly evaluate any policy you're looking to buy.

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