June 20, 2022
Q. What is a variable annuity?
A. This is where I think a lot of confusion about annuities comes into play.
Variable Annuities have two parts:
i. Insurance (like the fixed annuity I described last week)
ii. Underlying investments - these are generally mutual funds (called subaccounts), so the balance can fluctuate.
Variable annuities often carry “riders.” There is an additional cost for those riders, but they act as an “insurance” policy, for lack of a better term, and the buyer needs to determine if the cost of the insurance is worth the additional benefits that are brought to the table. The top two riders we see the most include:
i. Guaranteed minimum accumulation benefit (GMAB) - this benefit provides a minimum growth rate to the base of the annuity. The goal is to protect the principal from market fluctuations by ensuring a minimum credit (sometimes called interest) rate is applied to the annuity throughout the holding period (called accumulation), and prior to taking withdrawals.
ii. Guaranteed minimum income benefit (GMIB) - this provides the policy holder with a “guaranteed” monthly payment (usually expressed as a percentage of the “base”) at a set age. The benefit of this rider is that even if the portfolio value goes down, the payout will still continue. Note the guarantee is that of the insurance company, so make sure that their financial statements are strong.
Like any tool that helps you achieve your goals, annuities are not for everyone, but they are a good fit for some. They get a bad rap sometimes because of their cost, but for some the added cost is worth it and should be used (in our opinion) when it helps improve their plan success rate.
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