Today we tackle the Polaris Select Investor Variable Annuity from AIG. If you have read any other reviews here than you know that I am not a big fan of variable annuities because of the fact that: they typically have high fees + they expose the principle balance to market downside + are usually very complex fee and payout structures + they usually contain onerous withdrawal penalties. Is the Polaris Select Investor Variable Annuity any different? In my opinion it isn’t, it only attempts to look like it is. I did make a promise to another analyst here at AnnuityInvestigator that I would be fair minded in this review and discuss the potential positive aspects of the Prudential Defined Income Variable Annuity. (Who says I’m not fair minded? I think I am being fair minded, I just don’t like variable annuities that much compared to other options). Anyway, here goes.
Let’s start out with a quote from the Polaris Select Investor Variable Annuity prospectus:
“Variable Annuities involve risks, including possible loss of principal, and are not a deposit or obligation of, or guaranteed or endorsed by, any bank. They are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other agency. These securities have not been approved or disapproved by the SEC, nor any state securities commission, nor has the SEC passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.”
So keep in mind you can lose money, but let’s take a look at how you can grow your money with the Polaris Select Investor Variable Annuity. After you open your Polaris Select Investor Variable Annuity account you are given the option of investing your money in hundreds of different investment choices. I did not count them all, but a list is available here, so be sure and have a look yourself. The choices run the gamut, from low-risk and low-yield bond portfolios to high-risk and potentially high-return aggressive allocation portfolios.
How Does a Variable Annuity Differ From a Fixed Index Annuity?
Although the financial goals and objectives for people typically interested in annuities are usually quite similar, the way different types of annuities help people achieve those goals and objectives can be completely different. Fixed index annuities can provide a guaranteed income stream for life, well so can variable annuities. Fixed index annuities can grow your money, well variable annuities can grow your money too. So what’s the difference?
First off, generally speaking variable annuities have higher fees than fixed index annuities. Also, variable annuities usually have a more complex structure than fixed index annuities making them difficult to determine exactly what fees are charged, what penalties might be incurred for lump sum withdrawals and how gains are credited. For example the Polaris Select Investor Variable Annuity prospectus is 84 pages long add to that the investment choices prospectuses which can be hundreds of pages long and you can have over a thousand pages to read.
In addition, with fixed index annuities your money is never at risk due to market downturns. So what this means is that if the market goes up your money can go up, but if the market goes down your money won’t follow the market down.
With variable annuities your money is at risk of being lost, your money will follow the market down. Worst case? Your money is all gone. Is that a probable or like scenario? No, but be aware of potential. However just like with the fixed index annuity your money can follow the market upwards.
Why would anyone choose a variable annuity over a fixed index annuity? The fixed index annuity does not have the potential market downside losses that the variable has. Why would anyone risk their money to market downturns if they didn’t have to?Drum roll please and the answer is: Risk vs Reward. The typical variable annuity offers a lot more upside potential than the typical fixed index annuity, so consequently it can potentially offer more lifetime income.
Fees and Expenses Are High
The Polaris Select Investor Variable Annuity has a very complicated fee structure which you can find starting on page 10 of the prospectus. The fees can vary dramatically since very few of fees and expenses are fixed costs, here we can see in this excerpt from the prospectus that the maximum annual fees can be as high as 7.24%.
The example assumes that you invest $10,000 in the contract for the time periods indicated; that your investment has a 5% return each year; and you incur the maximum or minimum fees and expenses of the Underlying Fund as indicated in the examples. Although your actual costs may be higher or lower, based on these assumptions, your costs at the end of the stated period would be the amounts set forth in the tables below
MAXIMUM EXPENSE EXAMPLES (with election of the C-Share Option) (assuming maximum separate account annual expenses of 1.70% (including the optional Return of Purchase Payment death benefit and the C-Share Option) and investment in an Underlying Fund with total expenses of 7.24%.*)
(1) If you surrender your contract at the end of the applicable time period:
1 year=$511 3 years=$1,553 5 years=$4,068 10 years=$7,386
(2) If you do not surrender or if you annuitize your contract at the end of the applicable time period:
1 year=$511 3 years=$1,553 5 years=$4,068 10 years=$7,386
What is A Surrender Charge?
The Polaris Select Investor Variable Annuity is designed to be a long term retirement product and because of this AIG wants to lock your money up and penalizes you if you take your money out during the first 5 years. During the first year the surrender penalty fee is 7%, the second year it is 7%, third year 6%, fourth year 6%, and the fifth and final year it is 5%.
You: Why would I need to withdraw money?
Me: Think about it. Even if you are not planning on making withdrawals emergency life events can occur, from car accidents to other potential investment opportunities.
The Bottom Line
Variable annuities should be examined closely before purchasing. They are complex financial instruments with numerous features contained within the intricate wording of the contract. The guaranteed rates of growth on the income account value might sound appealing, but remember that this amount is not available for lump sum withdrawals and is only used for age based income calculations, so do your due diligence before purchasing this product and at the very least spend some time reading the prospectus.
If you are still considering a variable annuity and want to be sure it is right for you than make sure you get the annuity tested. We can do that for you here at AnnuityInvestigator and we can help you determine if the returns that your agent/ advisor is illustrating for you are realistic. We can also answer additional questions and give you some ideas about strategies that mirror the upside potential of variable annuities but don’t have the downsides of variable annuities (high fees, withdrawal penalties, no downside protection, etc).
For Your Consideration
This is an independent product review, not a recommendation to buy or sell an annuity. This review is not endorsed by any insurance company and I do not receive any compensation for this review. This review is meant to be an independent analysis to provide the reader with information and concepts to help them make informed decisions. Before purchasing any investment product be sure to do your own due diligence and consult a properly licensed professional should you have specific questions as they relate to your individual circumstances. All names, marks, and materials used for this review are property of their respective owners.