Are Variable Annuities Right for Your Clients?

Yongling Ding; Peterson, James D.
January 2003
Journal of Financial Planning;Jan2003, Vol. 16 Issue 1, p66
Academic Journal
This article develops a profile for potential variable annuity (VA) owners and for current VA owners in the U.S. who might be candidates for a tax-free exchange. Some would argue that VAs are rarely appropriate investments, primarily because of the costs of VAs, mortality and expense (M&E) risk costs and insurance company surrender fees, versus the perceived benefits. Others would argue that when it comes to long-term investing, VAs trump mutual funds held in taxable accounts despite the M&E costs, primarily because investment returns from a VA are tax deferred. The truth probably lies somewhere between these two extremes. In some situations, investing in VAs may be a good choice, while others investing in securities held within a taxable account may be more appropriate. A critical component in developing this profile is the determination of the minimum time horizon required for the tax benefits of VAs to outweigh the often higher fees imposed by VAs relative to mutual funds. The main conclusion is that, under the right circumstances, VAs may be appropriate for those highly taxed investors with at least a five-year investment time horizon who have reached their contribution limits in qualified plans. This conclusion applies to situations where the investor is not subject to early withdrawal penalties.


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