Retirement Council of America Inc.

Variable Annuities

This type of annuity is classified as a security. Variable annuities transfer the investment risk from the insurance company to the annuity owner. Typically these types of annuities are invested in underlying mutual funds.

If the mutual funds underlying a variable annuity perform well then the owner is likely to be pleased because they have made money. On the other hand, if the underlying mutual funds perform poorly or fall in value, as can easily happen, then the overall value of the variable annuity can plunge dramatically.

These annuities can often lose 50% or more of their value. We have seen worse cases than that, and it is for this reason that we do not encourage our clients to take on such risks. Like mutual funds and other stock market investments, these variable annuities can go horribly wrong and the potential for loss can often far outweigh the potential for gains.

During the recent stock market crash none of our clients lost any money because we were able to steer them in the right direction to profitable, guaranteed alternatives better tailored to the individual needs and expectations.

In addition to great market risk, these variable annuities are generally expensive because two sets of charges are being levied against the value of the annuity. The first charge comes from the underlying mutual fund, and the second comes from the insurance company who issues and administrates the variable annuity.

Imagine losing a substantial portion of your investment and still having to pay these charges, further compounding your loss. It is amazing to us why people would wish to take on such risks when they cannot afford the potential losses that may result. It should be noted that variable annuities typically have surrender charges and these factors should be taken into consideration when making a decision.

These types of annuities are right for some clients and can be potentially profitable; however, we strongly suggest caution and careful planning in order to match the annuity with the needs and risk-tolerances of the client.

Every variable annuity comes with a prospectus which you should carefully read, and you should also seek independent qualified advice from someone other than the person or organization responsible for the sale of the annuity. Carefully consider all risk factors, claims, and guarantees.

At Retirement Council of America Inc. we believe that a well informed client is a happy client, and important financial decisions should stem from sound, reliable, and qualified sources of knowledge.

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