Annuity IQ

There was a recent article posted on thestreet.com talking about four alternatives to variable annuities. What the author failed to mention was there is no true alternative to a variable annuity and the suggestions made have totally different objectives and purposes than what a variable annuity can provide.

Basically, the author said to look at fixed annuities, equity index annuities, immediate annuities and variable life insurance. Each one of the previous listed annuity products are different from variable annuities and are not relevant to why people actually buy a variable annuity.

Many of you reading this post already know the differences between the afore mentioned products, but lets rehash them anyhow.

A fixed annuity is a product that guarantees your principal and will pay you either a level or variable interest rate. This product is totally different than a variable annuity which invests your money into sub-accounts that fluctuate with the market. The only things these two products have in common is the fact that they are issued by insurance companies, they both use the term ‘Annuity’ in their name and they can both be annuitized.

Equity index annuities are not an alternative to variable annuities. An equity index annuities return is tied to the market or to a market index, but typically an equity index annuity will give you a return similar to a fixed Annuity over the long term. This is true because of participation rates, caps, averaging, spreads or combination of these gems that they offer.

An immediate annuity is an income producing product that will guarantee you payments for a certain period or for the rest of your life. Typically, an immediate Annuity does not offer any upside potential and your payments are locked in for the term you chose when you purchased the product. How in the world this product could be compared to a variable annuity is beyond me.

Variable life insurance is not even an annuity product, just look at the name ‘variable LIFE INSURANCE’. The only thing variable life has in common with annuities, of any kind, is the fact that they are issued by an insurance company. This is a life insurance product that does allow you to invest in sub-accounts, but this product is not really a good investment alternative.

Variable life insurance has an annual renewable term insurance component to it. This means as you get older the cost for that insurance goes up, typically. Because of the rising cost of insurance many people say that the only way a VUL really makes sense is if you over fund it. This type of insurance does have its place, but not as a replacement for a variable annuity.

When I took my life insurance license class, 13 years ago, the one statement stood out above all was when my instructor said, “Life insurance is a horrible investment”. After 14 years in the business I have to agree with his statement. Life insurance is life insurance and not a smart way to save for retirement, unless it is part of a bigger financial plan.

The bottom line is this, a variable annuity offers investors the best of all worlds. If you want a principle guarantee you have it through some type of living benefit. If you want to hedge your investments, you can with the use of a living benefit and a guaranteed fixed account (which, usually, do not carry any fees).

If you want to make sure your heirs have money left when you pass on, a variable annuity has several death benefit options to choose from. Even though the death benefit may be taxable and there is no step-up in cost basis it will still accomplish your goals and leave a legacy for your heirs.

To say that there are alternatives to a variable annuity is correct, but the four alternatives laid out in this article are not correct. People have to face the facts and the facts are variable annuities offer investors protection, diversification and relative simplicity under one umbrella. The variable annuity accomplishes this at a relatively low cost, something only a few of the ‘alternatives’ offer.

Do not get me wrong, I think the article was fairly well written and positive for insurance products. The issue I had with it is that there are not any real alternatives for a variable annuity. There are similar investments that can be made outside of the insurance world, but none of these other products offer the security or options that a variable annuity can provide.

Related Link: term insurance