Variable annuity guarantees are no “free lunch.”‘ A recent Wall Street Journal article, “Long Derided, These Investments Now Look Wise Thanks to Guarantees, Variable Annuities Paid Even When Stocks Didn’t” touts the benefits of the guarantees in some variable annuity contracts. However, it did not discuss the pitfalls that could reduce those benefits.
Most investors can’t easily read the contract and understand how to not to jeopardize the guarantee. A portion of a contract I reviewed has over 5,100 words on eight pages of small print just to describe the “Minimum Guaranteed Income Benefit rider”; the entire contract is over 80 pages excluding appendices. There’s complex language describing numerous factors that could reduce the benefit of the guarantee. The factors I’ve seen include certain withdrawals and certain changes to the investment allocations.
In many contacts, the owner has to “annuitize” – convert the “guaranteed amount” into a fixed stream of payments for life or fixed number of years. This is an irrevocable decision with its own set of risks including the risk that inflation will significantly reduce the “buying power” of the payments. And, figuring the amounts, if any, that may be withdrawn without jeopardizing the guarantee requires reading several pages of the contract.
It’s important for investors to remember that there are no free lunches in investing. Buyer beware – especially with investments that require long term commitments and limit your options.