Could a New Variable Annuity Be Right for You?

Some new variable annuities are available to replace those that insurers found too generous to customers during the financial crisis.

However, only you can decide if one is right for you.

A variable annuity is a contract with an insurance company.

Simply put, you give the insurance company a sum of money now, and the funds are invested in a sub-account of securities. At some later date, you receive payments that are based on the performance of the securities in the sub-account.

However, for an additional fee you can buy downside protection, which means that if the securities in the sub-account perform poorly, you can exchange the decreased sums for lifetime payments of a guaranteed minimum amount.

How Does it Work?

Downside protection features usually involve a guaranteed minimum benefit base used to calculate your annual income if you exchange decreased sums for lifetime payments of a guaranteed minimum amount.

The problem for insurers in 2008 and 2009 was that the benefit base was reset at regular intervals – annually or more often – to incorporate gains from the owner’s overall annuity.

Many also promised high minimum annual gains, in some cases 7%. Those guarantees strained insurance companies after the market contraction of 2008 and 2009.

As a result, many insurance companies took them off the market.

Now, a number of new downside protection features are being offered.

Many promise minimum annual gains, albeit lower ones such as 5% instead of 7%.

Some make annuity holders in their mid-to-late 60s eligible for annual income of 5% of the base.

As appealing as that may sound, you’d be wise to know the rules before you invest, and consider all the pros and cons of annuities, including fees.