The Pacific Choice Variable Annuity from Pacific Life 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. The Pacific Choice Variable Annuity has the option of providing a lifetime income stream, but you have to elect the option at contract inception and you pay an annual fee for this feature.
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.
Let’s start out with a quote from the Pacific Choice Variable Annuity offered by Pacific Life 168 page prospectus:
This Contract is a variable annuity, which means that your Contract Value fluctuates depending on the performance of the Investment Options you choose.*
An annuity contract may be appropriate if you are looking for retirement income or you want to meet other long-term financial objectives. Discuss with your financial advisor whether a variable annuity, optional benefits and which underlying Investment Options are appropriate for you, taking into consideration your age, income, net worth, tax status, insurance needs, financial objectives, investment goals, liquidity needs, time horizon, risk tolerance and other relevant information. Together you can decide if a variable annuity is right for you.
This Contract may not be the right one for you if you need to withdraw money for short-term needs, because withdrawal charges and tax penalties for early withdrawal may apply. You should consider the Contract’s investment and income benefits, as well as its costs.
So keep in mind you can lose money, but let’s take a look at how you can grow your money with the Pacific Choice Variable Annuity offered by Pacific Life. After you open your Pacific Choice Variable Annuity offered by Pacific Life account you are given the option of investing your money in a variety of different investment choices. I did not count them all, but as you can see here starting on page 16 the choices are many and each one comes with it’s own prospectus so now we are talking about thousands of pages of prospectuses (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.
What Else Do You Need To Know?
Fees, penalties and fine print. And the Pacific Choice Variable Annuity has lots of them. Are you ready?
Fees: The fees stated in the Pacific Choice Variable Annuity prospectus are as follows: there is a 0.95%-1.35% mortality and expense risk charge, a 0.25% administration fee, a 0.20% Stepped-Up Death Benefit II Rider Charge, and a 1.00%-2.75% fee for the optional riders. There also are annual separate investment management fees that range from .28% to 2.73%. Add the two fee categories together and you could potentially reach 7.28% in annual fees that you are charged even if you suffered a market loss for that year.
Penalties: The early withdrawal penalties period(surrender penalty) is a fee that you can be subject to upon early withdrawal of money from your account. The Pacific Choice Variable Annuity surrender penalty is called the Withdrawal Charge and on at least one of the choices it can be as long as 6 years and the amount can be as high as 7% in the first year. This product is designed for the long term and lump sum withdrawals in the first few years can be very expensive.
Fine Print: The 168 page prospectus for the Accumulator Series offered by Axa Equitable variable annuities can be found here.
The Pacific Life value proposition as per their Fact Sheet
Pacific Life Pacific Choice Variable Annuity benefits:
- Grow retirement savings faster through the power of tax deferral
- Protect against inflation and market volatility
- Manage your investment strategy
- Convert your assets through a guaranteed lifetime death benefit
- Leave a financial legacy through a guaranteed death benefit
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).
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.