Best of America Achiever Variable Annuity From Nationwide Review

Sherlock3Ready, Set, Go!

Today we take a look at the Best of America Achiever Annuity Variable Annuity.  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 Best of America Achiever Annuity 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 Best of America Achiever Annuity 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 with a quote from Nationwide’s Best of America Achiever Variable Annuity performance report:

“Variable annuities are for long-term investing; they’re not appropriate for short-term financial goals. And variable annuities have fees and charges that include mortality and expense fees, administrative fees and contract maintenance fees. These fees are a percentage of the investment account value.”

Is the Best of America Achiever Variable Annuity from Nationwide right for you? Let’s dive into the details and take a look.

 

annuity3Understanding Variable Annuities and Variable Annuities vs Fixed Index Annuities

To get started an annuity is just a contract between a person (like  you) and an insurance company.  Usually people who are looking into annuities are looking for certain contractually guaranteed financial terms and/or outcomes.  Most often people who are interested in annuities are attracted by the guaranteed lifetime income stream that annuities can provide and usually they are also seeking to grow their money; which potentially is something else that annuities can provide.  Additionally they may be interested in other features like death benefits or in-home health care benefits that some annuities may offer.

 

Apple Orange3Apples and Oranges

Although the financial goals and objectives for people 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.  Variable annuities can also provide a guaranteed income stream for life.   Additionally fixed index annuities can grow your money.  Well variable annuities can grow your money too.  What’s the difference?

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.

 

question markBest of America Achiever Variable Annuity.  What’s the deal?

According Nationwide’s Best of America Achiever Variable Annuity performance report:

Variable annuities offer a wide range of professionally managed investment options. With choices such as equity, bond and money market funds, you can create a portfolio designed to meet your investment goals. Please keep in mind that because these investment choices are subject to market fluctuation, investment risk and possible loss of principal, your annuity’s value will vary depending on how they perform.”

So keep in mind you can lose money, but let’s take a look at how you can grow your money with the Best of America Achiever Variable Annuity. After you open your Best of America Achiever 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 the list starts on page 4 of the performance report 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.

 

feesTell Me More

Fees & Expenses: The Best of America Achiever Variable Annuity has a minimum annual total fees and expenses charge of 2.00% and a maximum of 3.54%.  Wait, wait we’re not done yet because there also are investment management fees.  The minimum investment management cost is .45% annually and a maximum of 1.99% annually.  Just imagine if your Best of America Achiever Variable Annuity investment account only returns 5% to 6% returns in a year.   You’d just be breaking even.

Sales Compensation:  The maximum commissions paid on this product are 8%, no wonder your advisor thinks this is such a good choice for you!

Fine Print: The Best of America Achiever Variable Annuity prospectus is 243 pages long.  Add to that the underlying investment accounts prospectuses which can be just as long and you have a thousand pages of reading material.

slow

Bottom Line

High fees, high risk.  Is it right for you?  Potentially yes, it might  perfectly help you execute your financials plans and has the right balance between risk-vs-reward for you, but please consider it carefully.  There is no need to rush into the Best of America Achiever Variable Annuity.  Read some of our other reviews and make sure you compare it to some of the fixed index annuities.

 

 

annuity4Personal Note

You may be able to tell from the review that I am not a big fan of variable annuities, but I did try to be as fair minded as possible.  My take on variable annuities is if you what you are looking for is uncapped growth and you are willing to take the downside risks of the market than just open a brokerage account and invest in the positions directly.  This way you are going to save on all the variable annuity related fees and you can access your money without having to worry about penalties.

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 AnnityInvestigator and we can help you determine if the returns that your agent or 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).

 

Caution2For 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.

 

 

Lincoln Financial Group Investor Advantage Variable Annuities

Sherlock3Let’s Get Started

The Lincoln Financial Group Investor Advantage Variable Annuities are a group of variable annuities offered by Lincoln Financial Group which are part of their Lincoln Investor Advantage suite.   Currently there are 4 variable annuity choices in the Lincoln Investor Advantage suite and all 4 choices have very similar sounding names and operate mostly the same way with just slight variations.  The 4 choices are: (1) the Lincoln Investor Advantage B-Share, (2) the Lincoln Investor Advantage C-Share, (3) the Lincoln Investor Advantage Fee-Based, and (4) the Lincoln Investor Advantage RIA.  I will not get into the slight differences between the 4 choices,  but feel free to contact us here at Annuity Investigator if you want more details on the differences.

Let’s start with a brief overview of variable annuities before we get into the details of the pros-and-cons of the Lincoln Financial Group Investor Advantage Variable Annuities suite.

 

annuity2What Is a Variable Annuity?

A variable annuity is a contract between a person (like you) and an insurance company. It’s a generally designed as a long-term investment for retirement purposes. The person opening the variable annuity account places money in professionally managed investment portfolios, where potential growth can accumulate in a tax-deferred manner. When the person who opened the variable annuity account retires, the monies that potentially accumulated in the variable annuity can be used to generate a stream of regular income payments that are guaranteed for as long as they live. Additionally some variable annuities  may provide a guaranteed death benefit for the persons beneficiaries.

 

How Does a Variable Annuity Differ From a Fixed Index Annuity?

Although the financial goals and objectives for people 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.  Variable annuities can also provide a guaranteed income stream for life.   Additionally fixed index annuities can grow your money.  Well variable annuities can grow your money too.  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 Lincoln Investor Advantage B-Share prospectus is 153 pages long.

stock marketIn 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.

 

fee2What Else Do You Need To Know?

Fees, penalties and fine print.  And the Lincoln Financial Group Investor Advantage Variable Annuities have lots of them.  Are you ready?

Fees:  To start there is a nominal $35 annual account fee and .10% admin charge.  Next there are the mortality and expense risk charges which can run from 1% to 1.15% depending on the product and the death benefit charge can run anywhere from 1.40% to 1.70%.  Finally the annual investment choice fees run from .79% to 1.71%.  You may find some lower fees and some higher fees, but that was the lowest and highest I found. You are welcome to scroll through them yourself here, I found them starting on page 15 of 153.

Penalties:  The early withdrawal penalties (surrender penalty) is for the first 5 years on the B-Share product.  The first year it is 7%, the second year it’s 6%, third year 5%, fourth year is 4%, and the fifth year is 3%.   This product is designed for the long term and lump sum withdrawals in the first 5 years can be very expensive.

Fine Print: The prospectus for the Lincoln Investor Advantage C-Share variable annuity.

big-logo copyPersonal Note

You may be able to tell from the review that I am not a big fan of variable annuities, but I did try to be as fair minded as possible.  My take on variable annuities, is if you want uncapped growth and you are willing to take the downside risks of the market, then research opening a brokerage account and invest in the positions/funds directly. This way you are going to save on all the variable annuity related fees and you can access your money without having to worry about penalties.

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 or 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).

 

CautionFor 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.

 

 

 

 

Jackson National Elite Access Variable Annuity

Sherlock3Let’s Look Deeper

The Jackson National Elite Access Variable Annuity is a variable annuity as the name suggests.  If you are not familiar with the term, an annuity is just a contract or agreement between a person (like you) and an insurance company.  Commonly people who research (and may ultimately end up investing in) annuities are looking to grow their money, and for the lifetime income stream option that many annuities offer.

The lifetime income stream is called a living benefit because you get the benefit while you are living.  Keep in mind that the lifetime income stream is a separate feature from the growing your money feature. Though many (most) fixed index and variable annuities offer both features, the two features are distinct and separate and having one does not guarantee that an annuity has the other.  In fact the Jackson National Elite Access Variable Annuity does not have the option of providing a lifetime income stream, the Jackson National Elite Access Variable Annuity is designed for market growth purposes only.

You: You mentioned fixed index annuities, I have heard of them.  What is the difference between fixed index annuities and variable annuities?

Me: With fixed index annuities the growth of your money is tied to an index like the S&P 500 Index.  Your money is not actually in the market so it 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.

Me: With variable annuities your money is at risk of being lost.  Your money is invested in the market so 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.

You: Why would anyone choose a variable annuity over a fixed index annuity?  

Me: Because although the fixed index annuity does not have the potential market downside losses that the variable has, the typical variable annuity offers a lot more upside potential than the typical fixed index annuity.  Bottom line is that you potentially could grow your money faster in a variable annuity. 

PaperworkMarket Growth Purposes, Not Living Benefit Purposes

The Jackson National Elite Access Variable Annuity as I stated previously is designed to be an investment vehicle only.  What makes the Jackson National Elite Access Variable Annuity a little different from other variable annuities is that the Jackson National Elite Access Variable Annuity offers you the option to place some of your portfolio into alternative investment (or “alts” for short).

You: What are “alts” and why would I want them in my portfolio?

Me: “Alts” are just investment choices other than typical stocks and bonds.  They are mostly comprised of futures, commodities and arbitrage strategies.  The reasoning is (and something that Jackson National promotes in their marketing material) that research has shown that adding “alts” to stock and bond portfolios increases market returns and lowers risk.  That does not mean that if your portfolio is comprised of just stocks and bonds that you need to add alternative investments, as always your results may vary.

Me: In addition to alternative investment choices, the marketing material for the Jackson National Elite Access Variable Annuity says that another feature of the annuity is the added benefit of risk management and tactical management.   Risk management is a term meaning that they seek to address market unpredictability and volatility while seeking long-term growth.  Tactical management just means that they practice asset allocation flexibility strategies that proactively responds to all market cycles, positive and negative.

You: So in other words they move money around to try to avoid big losses and/or make bigger gains.

Me: Yeah, that about sums it up.  What a novel idea, huh?

fee2What Else Do You Need To Know?

Fees, penalties and fine print.  And the Jackson National Elite Access Variable Annuity has lots of them.  Are you ready?

Fees: A base fee of 1% annually and investment choice fees that run from .55% to 2.71%.  Admittedly this is not as high as many other variable annuities, but still you should be aware of them.

Penalties:  The early withdrawal penalties (surrender penalty) is for the first 5 years.  The first year it is 6.5%, the second year it’s 6%, third year 5%, fourth year is 4%, and the fifth year is 3%.   This product is designed for the long term and lump sum withdrawals in the first 5 years can be very expensive.

Fine Print: The prospectus for the Jackson National Elite Access Variable Annuity is 708 pages long.

calcBottom Line

Higher fees, higher risk.  Is the Jackson National Elite Access Variable Annuity right for you?  Not sure…does it  perfectly help you execute your financial plans and has the right balance between risk-vs-reward?  If you’re not educated fully on it, or how it will affect the rest of your portfolio, slow down and please consider it carefully.

There is no need to rush into the Jackson National Elite Access Variable Annuity. Read some of our other reviews and make sure you compare it to owning a low cost portfolio of indexed funds, or if you want to limit losses, compare it to some of the fixed index annuities reviews on this site.

big-logo copyPersonal Note

You may be able to tell from the review that I am not a big fan of variable annuities, but I did try to be as fair minded as possible.  My take on variable annuities, is if you want uncapped growth and you are willing to take the downside risks of the market, then research opening a brokerage account and invest in the positions/funds directly. This way you are going to save on all the variable annuity related fees and you can access your money without having to worry about penalties.

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 or 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).

 

slowFor 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.

 

 

 

 

Jackson National Perspective II Variable Annuity

Sherlock3A Fair-Minded Review

Today we take a look at the Jackson National Perspective II Variable Annuity.  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 your money to market downside risk, they usually have very complex terms and conditions and they usually have high surrender fees (lump sum withdrawal penalties).   Is the Jackson National Perspective II Variable Annuity any different?  In my opinion it isn’t, it only attempts to look like it is.  So let’s take a look and then you decide.

 

 

 

annuity3What Is a Variable Annuity?

A variable annuity is a contract between a person (like you) and an insurance company. It’s a generally designed as a long-term investment for retirement purposes. The person opening the variable annuity account places money in professionally managed investment portfolios, where potential growth can accumulate in a tax-deferred manner. When the person who opened the variable annuity account retires, the monies that potentially accumulated in the variable annuity can be used to generate a stream of regular income payments that are guaranteed for as long as they live. Additionally some variable annuities  may provide a guaranteed death benefit for the persons beneficiaries.

 

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 Stock symbolsexample the Jackson National Perspective II Variable Annuity prospectus is 850 pages long!

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.

feesFees

You: You keep talking about fees.  What kind of fees are we talking about?

Me: With the Jackson National Perspective II Variable Annuity, Jackson National charges a 1.30% for basic variable annuity charges (mortality/expense risk charge and admin)   Well 1.3% that seems pretty reasonable.  Unfortunately we’re not done. There are a lot of other fees. There are the subaccount fees that range from .57% ti 2.23%.  There are potentially also rider fees in the event you want the income for life feature.  All in all we are hitting the 5% to 6% annual fee range depending upon your investment choices.  Just imagine if your Jackson National Perspective II Variable Annuity investment account only returns 5% to 6% returns in a year.   You’d just be breaking even.

Bottom CalculatorSurrender Charges

Other fees that someone may incur are the surrender penalty fees associated with taking lump sum withdrawals out.  The Jackson National Perspective II Variable Annuity is designed to be a long term retirement product and because of this Jackson National wants to lock your money up and penalizes you if you take your money out during the first 7 years.  During the first year the surrender penalty fee is 8.5%, the second year it is 7.5%, third year 6.5%, fourth year 5.5%, and on down to 0% after the 7th year.

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.  

 

annuity2What about The Guaranteed Income?

To start out you first have to understand the way money available for the guaranteed income stream grows in the Jackson National Perspective II Variable Annuity.  The Jackson National Perspective II Variable Annuity has two accounts:

The first one holds your principal which is where the money that is available for lump sum withdrawals is kept.  It works just like your checking or savings account.  We’ll just refer to this as your principal account.

The second account just holds the value from which your lifetime income stream would be calculated from, the money in this account is not “real” in the sense that it is available for lump sum withdrawals just the same way that you cannot go down to your local Social Security office and try to take a lump sum withdrawal from the social security benefits you have accrued.  We’ll just refer to this as the income account.

$$$How Much Income Can You Get?

The Jackson National Perspective II Variable Annuity income offers a rider which allows your income account to grow at a minimum guaranteed rate.  A rider is just an addendum to an annuity contract where it adds feature to the contract, usually for a cost.   With the Jackson National Perspective II Variable Annuity the rider (contract addendum) to add a minimum guaranteed growth rate can costs between 1% up to 2.50% per year.  The rider fee is on top of the subaccount and base fees we spoke about earlier.  If you buy the optional rider which guarantees a minimum rate of growth for the income account, the minimum guaranteed rate of growth choices varies between 5 to 7% annually (depending which option you chose when you purchase the annuity).  Keep in mind this guaranteed minimum rate of growth is not available for lump sum withdrawal purposes.  The guaranteed minimum rate of growth is on the income account not the principal account.

Once again the income account value is not available for lump sum withdrawals, it is the value that your guaranteed lifetime income is based off.  What Jackson National does is that when it is time to turn on your lifetime income stream they look at the value in the income account and then multiply it by a payout factor to determine the amount of money you will receive on an annual basis*.  The older you are the higher the payout factor, so the longer you wait to turn on the lifetime income stream the more money you will get per year.

According to the Jackson National Perspective II Variable Annuity prospectus on page 134 the age based payout factor is between 4.5% and 5.5%.  So if two different people had the same income account value but were of different ages when they turned on the income stream than their annual income amounts would differ.  For example if the income account value was $100,000, the 54 year old would get $4500 per year for life and the 60 year old would get $5500 per year for life.

Now comparing the age dependent payout factor of the Jackson National Perspective II Variable Annuity to the age dependent payout factors of other annuities it is easy to find other annuities that for the same age the payout factor is significantly more.  So what this means is that you could have an annuity with a lower guaranteed annual increase in the income account, but with a higher payout factor and the net results could mean more yearly income.

So the moral of the story is that their are two factors to consider when evaluating the potential  income performance of the Jackson National Perspective II Variable Annuity.  You have do your homework and look at both the minimum guaranteed growth rate of the income account and the cost of the associated rider that gives you that minimum guaranteed rate of growth in the income account.  In addition it is always a good idea to look and compare the age-based payout factors between annuities when evaluating when evaluating them.  The higher the payout factor the higher the annual income.

 

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.Paperwork

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).

 

slowFor 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.

 

 

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Prudential Defined Income Variable Annuity

Sherlock3Details, Details, Details

Today we tackle the Prudential Defined Income Variable Annuity.  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 Prudential Defined Income 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.

 

annuity4What Is a Variable Annuity?

A variable annuity is a contract between a person (like you) and an insurance company. It’s a generally designed as a long-term investment for retirement purposes. The person opening the variable annuity account places money in professionally managed investment portfolios, where potential growth can accumulate in a tax-deferred manner. When the person who opened the variable annuity account retires, the monies that potentially accumulated in the variable annuity can be used to generate a stream of regular income payments that are guaranteed for as long as they live. Additionally some variable annuities  may provide a guaranteed death benefit for the persons beneficiaries.

 

How Does a Variable Annuity Differ From a Fixed Index Annuity?

Although the financial goals and objectives for people 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.  Variable annuities can also provide a guaranteed income stream for life.   Additionally fixed index annuities can grow your money.  Well variable annuities can grow your money too.  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 Prudential Defined Income Variable Annuity prospectus is 104 pages long.

stock marketIn 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.

fee2Fees

You: You keep talking about fees.  What kind of fees are we talking about?

Me: With the Prudential Defined Income Variable Annuity, Prudential charges 1.9% in fees for the annuity account, but it also reserves the option to increase the fees to 2.6%.  Now keep in mind these are the annuity account fees, but you will also get hit with the portfolio fees (like mutual fund fees) and these can be as high as 1% as well.  So now the total potential annual fees can be in the 3.5% range.  Just imagine if your Prudential Defined Income Variable Annuity investment account only returns 4.5% a year, than your net will be around 1%!

AccountantOther Fees

Other fees that someone may incur are the surrender penalty fees associated with taking lump sum withdrawals out.  The Prudential Defined Income Variable Annuity is designed to be a long term retirement product and because of this Prudential wants to lock your money up and penalizes you if you take your money out during the first 7 years.  During the first 2 years the surrender penalty fee is 7% which falls to 6% for the second to fourth year and then drops to a 5% surrender penalty for the remainder up until the seventh year.

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.

 

scale 1What about The Guaranteed Income?

To start out you first have to understand the way money available for the guaranteed income stream grows in the Prudential Defined Income Variable Annuity.  The Prudential Defined Income Variable Annuity has two accounts:

The first one holds your principal which is the money that is available for lump sum withdrawals just like your checking or savings account.  We’ll just refer to this as your principal account.

The second account just holds the value from which your lifetime income stream would be calculated from, the money in this account is not “real” in the sense that it is available for lump sum withdrawals just the same way that you cannot go down to your local Social Security office and try to take a lump sum withdrawal from the social security benefits you have accrued.  We’ll just refer to this as the income account although the Prudential Defined Income Variable Annuity promotional brochure they refer to it as the “protected withdrawal value.”

How Much Income Can You Get?question man

The Prudential Defined Income Variable Annuity income account grows guaranteed at 5.5% annually.  Once again this value is not available for lump sum withdrawals, this is the value that your guaranteed lifetime income is based off.  What Prudential does is that when it is time to turn on your lifetime income stream they look at the value in this income account and then multiply it by a payout factor to determine the amount of money you will receive on an annual basis*.  The older you are the higher the payout factor, so the longer you wait to turn on the lifetime income stream the more money you will get per year.

According to the Prudential Defined Income Variable Annuity prospectus in Appendix C-1, at age 60 the payout factor is 4.5% and grows to 5% at age 65.  So if two different people had the same income account value but were of different ages when they turned on the income stream than their annual income amounts would differ.  For example if the income account value was $100,000, the 60 year old would get $4500 per year for life and the 65 year old would get $5000 per year for life.

Now comparing the age dependent payout factor of the Prudential Defined Income Variable Annuity to the age dependent payout factors of other annuities it is easy to find other annuities that for the same age the payout factor is significantly more.  So what this means is that you could have an annuity with a lower guaranteed annual increase in the income account, but with a higher payout factor and the net results could mean more yearly income.

So the moral of the story is that their are two factors to consider when evaluating the potential  income performance of the Prudential Defined Income Variable Annuity.  You have do your homework and look at both the 5.5% guaranteed growth rate of the income account AND the age-based payout factor when evaluating annuities.

*Additionally the age-based payout factor is also based on your age you are when you first buy the Prudential Defined Income Variable Annuity.

 

big-logo copyThe 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 5.5% guaranteed rate of growth on the income account value might sound appealing, but remember that 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).

 

Caution2For 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.

 

 

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