Steering your variable annuity through troubled waters
If you're a variable annuity (VA) holder, your stomach may be churning along with the stock market. You may be considering shifting your money among subaccounts, or even bailing on your VA altogether. Before you take any action, here's what to know.
|VA riders that can
ease the pain
|These riders may give you an extra comfort level with your variable annuity during volatile financial times.
Consider a guaranteed minimum income benefit rider. These riders guarantee that payments from your variable annuity will never fall below a certain amount of your investments.
Consider a guaranteed minimum income benefit rider. This assures that you will receive some amount for your entire lifetime.Weigh the cost of these before you buy.
First, know that troubles in the market have nothing to do with the insurers that sell annuities, says Joe Montminy, associate research director of retirement research at LIMRA.
"Of all the carriers that offer VAs, none are having the financial difficulties that you're seeing. It's the holding companies that are parents of the insurance companies. Those insurance companies are still very solid because they're regulated by insurance commissioners, and they have the funds they need. The companies are not where you should be concerned: You have to look at your risk tolerance of where you've invested your money because the stock market has declined," Montminy says.
Before you alter your long-range variable annuity plans, do your research on what you have and where you're going.
Rosemarie Mirabella, manager of research and emerging issues for life and annuity at A.M. Best, says that variable annuityholders "should review their funds and the diversification in the funds. Obtain a copy of their prospectus. Review the [fund] manager in terms of his or her track record. Stay with it, because depending on the particulars of your contract, if you surrender, there might be fees and surrender charges."
Overall, Mirabella suggests that VA holders to "stay the course. Possibly shift some monies where you have gains into fixed income if you're uncomfortable about the volatility. You could harvest some of your past gains: You could consider moving those monies into conservative investments, which could then be deployed back into the equities market when we've got some stability."
She also points out that it's as important as ever to monitor the ratings of your insurers to make sure no one is taking a slide down.
Bailing on one variable annuity contract and going to another can trigger a variety of costs. Montminy says, "If you swap VA to VA, you have a whole slew of things you need to be concerned about. It has to do with your age, tax deferrals, and surrender charges. Make sure you assess the full cost of surrendering your annuity. There may be a penalty if you surrender before age 59½. Look at why you purchased the VA and it still probably makes a lot of sense for the long term value it will offer." Montminy points out that things looked bad back in the early 2000s, when equity values dropped and many variable annuityholders jumped ship, but it turned around.
"Sometimes when you get into this kind of market you forget that you will get out of it," he says.
A variable annuity plan of action
If you're panicked about the underlying investments in your variable annuity, consider these tips before you take action with your contract:
Ask your insurer about its subaccount transfer fees. If you're thinking about switching your subaccount investments, ask your insurer how much it will charge you to do so.
Know when you plan to access the money. Keep in mind that variable annuities are long-term investments. If you're retiring within the next few years and plan on annuitizing at that point, you may consider moving toward more conservative investments. But if you're a long way from retirement, you may lose out on future growth if you switch your current investments.
Consider "fixed" annuitization. When you annuitize and begin to receive payments from your policy, your monthly payments can be either a fixed or a variable amount that reflects stock market performance. Choosing a fixed amount will guarantee a certain payment, but keep in mind that if you choose the fixed option, you will miss out on any growth that may occur in the future.
Look before you leap. If you want to get out of your annuity, find out the total costs of doing so, including surrender fees, penalties and tax consequences.