Variable annuities, which offer investors tax-deferred growth along with a measure of loss protection, haven't protected much as of late. In fact, sales of VAs suffered through a decline that lasted through five consecutive quarters.
Variable annuities, which offer investors tax-deferred growth along with a measure of loss protection, have been a popular investment choice for years, despite the negative reviews they have often gotten in the financial media. Yet, during the most memorable market meltdown in recent history, their loss protection feature didnâ€™t protect them from a major slump in sales. In fact, sales of VAs suffered through a decline that lasted through five consecutive quarters, until a slight uptick broke the trend in the third quarter of this year.
The bear market should have offered peddlers of variable annuities an ideal environment to sell their products. After all, who wouldnâ€™t want an investment that guarantees that you canâ€™t lose? Thatâ€™s the basic promise behind variable annuities: if the markets go up, so does your annuity; if they go down, you donâ€™t get back less than your original premium. What happened, though, is that insurance companies, who were also getting mauled by the bear, scaled back on loss guarantees while upping costs of annuities.
Another factor in the sales downturn may be that consumers are finally beginning to recognize the drawbacks of VAs, one of which is those higher costs. With an average expense ratio of about 2.1%, plus a â€œmortality and expenseâ€ fee that can be as high as 2%, a VA can cost you more than twice as much as an actively managed mutual fund. Another downside is the surrender period, which almost all annuities have. During the surrender period, which can stretch up to 15 years, youâ€™ll pay a hefty penalty if you want to take your cash out. For investors who need to tap into their nest eggs before the surrender period is up, this can be a major problem.