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By Bob Moeller
WEAC Member Benefits
April 2005
Financial
Planning Seminars
Achieving
Financial Independence
By pure coincidence, I had three individual meetings in a row recently with members who were subjected to rip-off products. It always distresses me when I have to show a member how they have bought products that essentially resulted in them being robbed of thousands of dollars. In one case, the member paid a total of $14,400 into a universal variable life policy over the past six years. His total withdrawal value when we met? $48.60. Yes, you read that right. Unfortunately. Those meetings got me in the mood to write this article.
You do not want to invest in a variable annuity. I am not talking about tax-sheltered annuities you have through your employment. I am talking about annuities you purchase with after-tax dollars. Because there is a life insurance element in each of them, you get to defer taxes on any gains you might have until you withdraw funds.
First, a simple explanation of what these are. You invest after-tax money with a life insurance company. You invest it in a selection of sub-accounts that seem like mutual funds although technically they aren’t. You are not taxed on any growth until you take out funds. Sounds good doesn't it? But it’s awful, and here’s why.
All in all, you do not want to buy individual variable annuities with your after-tax dollars. I should note that some no-load mutual funds with life insurance company connections also offer variable annuities. The only way they are somewhat better is the annual fees might be lower. For example, Vanguard lists fees between 1.25% and 1.6%. Fidelity Investment life is around 1.5%. Are they good deals? If you do have a variable annuity and don’t want to take it out because of taxes, it might make good sense to roll it over to Fidelity or Vanguard, assuming you are at a point where you have no withdrawal or transfer penalties.
Variable universal life is even worse; the fees are usually much, much higher. Yes, you do have an amount of life insurance involved, but generally it is overpriced. Reread the example in paragraph #1.
Experts who generally write on the side of the consumer sometimes suggest that if you have maxed out on your TSA, 401k, and IRA contributions, then maybe variable annuities might be acceptable. I’m not so sure, but considering that maxing out on a TSA for 2005 will take $14,000 or more ($18,000 or more if you are 50 or older), and that a Roth IRA will absorb $4,000 if under 50 and $4,500 if 50 or older, you probably do not have to worry about maxing out your limit.
If you have either a variable annuity, or a variable universal life, get out your December 31 statement. Ask yourself how much you have invested and how much it is worth now. Make the sales agent analyze what the future value might be assuming the market doesn’t go up. Review just what fees you are paying to the insurance company including insurance company fees and sub- account (mutual fund) fees. Don’t just accept a crummy product because you have been in it a few years.
Posted April 1, 2005