Introduction
As an investor exploring various annuity options, understanding variable annuities and their associated rates is crucial for making informed decisions. Unlike fixed annuities, variable annuities offer no stated interest rate, as returns depend on the performance of the underlying investment options. In this article, we’ll discuss how to shop for the best variable annuity rates and explain why there’s no definitive “best” rate due to the nature of these investment products.
Variable Annuities
Variable annuities offer the potential for higher returns based on the performance of underlying investments, usually a selection of mutual funds. Unlike fixed annuities, variable annuities offer no stated interest rate, as returns depend on the performance of the underlying investment options. In this article, we’ll discuss how to shop for the best variable annuity rates and explain why there’s no definitive “best” rate due to the nature of these investment products.
Factors affecting variable annuity rates include:
- Investment performance
The rate of return depends on the performance of the investment subaccounts chosen by the annuitant. Diversifying your investments across different asset classes and sectors can help reduce risk and potentially increase returns.
- Fees and charges
Variable annuities often have higher fees than other types, which can impact the overall return. These fees can include management fees, mortality and expense risk charges, and surrender charges. Be sure to understand all the fees associated with a variable annuity before committing to a contract.
- Additional features
Optional riders such as guaranteed minimum income benefits or death benefits can affect the overall performance. These riders can provide a safety net but often come at an additional cost.
Advantages (Theoretically)
- Potential for higher returns
Variable annuities offer the possibility of higher returns based on the performance of the underlying investments.
- Tax-deferred growth
Earnings within the annuity grow tax-deferred until withdrawn, potentially increasing the overall return.
- Investment flexibility
Annuitants can choose from a variety of investment options, allowing for greater customization of their portfolios.
Disadvantages
- Higher fees
Variable annuities often have higher fees and expenses than other annuity types, which can impact overall returns.
- Investment risk
Returns are not guaranteed and depend on the performance of the underlying investments, exposing annuitants to market risk.
- Complexity
The numerous investment options and optional riders can make variable annuities more complex and difficult to understand.
Shopping for the Best Variable Annuity Rates
When looking for the best variable annuity rates, consider the following factors:
- Evaluate the subaccounts:
Examine the available investment options within the annuity contract and assess their historical performance, fees, and risk levels. Evaluate the historical performance of the investment subaccounts and their managers.
- Compare insurance companies
Research multiple insurance providers to find competitive fees, contract terms, and available investment options.
- Assess fees and expenses
Variable annuities often come with various fees, such as management fees, administrative fees, and mortality and expense risk charges. Be sure to understand the total costs associated with the annuity contract.
- Consider optional riders
Some variable annuities offer optional riders, such as living benefits or death benefits, for an additional fee. Assess whether these features align with your financial goals.
- Check financial ratings:
Examine the financial strength and credit ratings of the insurance company offering the annuity to ensure they are reputable and stable.
Best Variable Annuities Rates. Is it a Thing?
Unlike Fixed Annuities, Variable annuities don’t have any return “rates.” In a variable annuity, the investor contributes money to the annuity, either through a lump-sum payment or a series of periodic payments. The contributions are then invested in a variety of sub-accounts, which are similar to mutual funds. So the entire return or the accumulation is dependent on how these sub-accounts perform. To summarize, the “best” rate varies depending on factors such as:
- Investment sub-account selection
The performance of the chosen sub-accounts directly impacts your returns. Selecting a diverse range of high-performing investments can potentially result in higher returns.
- Market conditions
Variable annuity returns are subject to market fluctuations, meaning that the "best" rate can change over time as market conditions evolve.
- Risk tolerance
The risk level of your chosen investments will also influence your returns. Higher-risk investments may offer the potential for greater returns, but they also come with a greater chance of loss.
If anyone asks me to suggest the best variable annuity rates, my first response is, “Why?”
What I mean is that it is generally a good idea not to invest in variable annuities. Variable annuities come with fees and expenses, such as management fees, insurance charges, and surrender charges. And they still expose investors to market risk, as the performance of the underlying investments can fluctuate.
For instance, consider John, who invested in a variable annuity that charged a 2% annual fee and a 1.5% investment management fee. Over 20 years, these fees can potentially decrease John’s returns by more than a whopping 30%, despite the underlying investments performing reasonably well. If you are planning to invest in variable annuities, you are better off investing in alternatives such as Mutual funds, Exchange-traded funds (ETFs), Index funds, Dividend Paying Stocks, or even Real estate investment trusts (REITs).
Also, especially for variable annuities, remember that past performance is not indicative of future results, and it is essential to thoroughly research your options before making a decision.
Conclusion
When it comes to variable annuities, there’s no definitive “best” rate, as returns depend on the performance of the underlying investment sub-accounts. By carefully selecting sub- accounts, considering fees, and evaluating optional riders, you can tailor a variable annuity to suit your financial goals and risk tolerance. Keep in mind that market conditions can impact your returns, so it’s crucial to stay informed and make adjustments as needed. Although, I generally do not recommend investing in variable annuities. Variable annuities often come with higher fees and expenses compared to other retirement savings options, and their returns are subject to market fluctuations, introducing additional risk.
For those seeking more predictable returns and lower costs, alternative retirement savings vehicles, such as fixed annuities, indexed annuities, or traditional investment accounts, maybe a better fit. It’s essential to carefully evaluate your financial goals, risk tolerance, and investment horizon before deciding to invest in a variable annuity.
If you’re unsure about whether a variable annuity is suitable for your retirement strategy, consider consulting with a financial advisor who can provide personalized guidance based on your unique financial situation. By exploring all available options and making informed decisions, you can build a retirement portfolio that meets your needs and provides financial security for your future.