What Do You Know about Variable Annuities?

Here are five questions to see how much you know about variable annuities.

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True or false: A variable annuity offers a guaranteed minimum rate.

False: Unlike a fixed annuity, a variable annuity's return depends on the performance of the subaccounts. These are generally mutual funds chosen by the insurance company issuing the variable annuity.


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True or false: One of the advantages of variable annuities is that they offer a death benefit.

True. Variable annuities do offer a death benefit, which usually means that your beneficiary will receive at least the amount of money that you contributed, even if the account value goes down, in the event of your death. However, most variable annuities charge an average fee, called the mortality and expense risk fee, of 1.25% for this benefit. That means you are paying this fee, in addition to other fees for administration that the vendor may charge, on top of the fees that the underlying mutual funds charge. It may be less expensive to invest directly in mutual funds through your 457 or 403(b)7 custodial account and purchase term life insurance if you are interested in a death benefit.


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True or false: Variable annuities charge surrender fees.

True: Most variable annuities charge surrender fees for at least six or seven years. The fees typically start at about 7% and step down a percentage point or so each year, although some variable annuities charge higher percentages and/or have a longer surrender period.


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True or false: A variable annuity can provide guaranteed lifetime income.

True: However, it depends on the annuity payout you choose. Once you are ready to start taking money out of your variable annuity at retirement, you may have a few choices. You may be able to take the money in a lump sum, in systematic payments, or you may annuitize the contract. If you annuitize, you may have more choices to make, such as choosing a guaranteed payment for life, for your life plus the life of a surviving spouse or other beneficiary, or for a "period certain" (a specific number of years).


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True or false: Variable annuities sometimes offer bonus credits.

True: Some variable annuities may offer bonus credits – an additional percentage of return – as an incentive to purchase the contract. However, while it may sound like a good idea, sometimes bonus credits end up costing you more money. Surrender fees may be higher or charged for a longer period, or the mortality and expense fee may be higher. Always investigate the fees and expenses charged by any investment you are considering for your 403(b) or 457 plan.