On my feature article blog, I’ve shared my feelings on variable annuities, and ended one of the posts with the note that Jefferson National offered a VA with costs so low, that for those who might benefit from such a product, I felt it worth considering. I was recently contacted by Jefferson and asked if I’d consider a guest post, and I agreed. I offer this disclaimer: I have not asked for nor was I offered any compensation for this post, my motivation is to bring to my reader’s attention financial information that may benefit them. After my rants regarding expensive VAs, sharing this with you seemed appropriate. The following appears unedited.
Refinancing Retirement: Trade-Up to a Flat-Insurance Fee VA through a Tax-Free 1035 Exchange
By Laurence Greenberg
Variable Annuities are Ripe for Exchange
In the ’90s bull market, consumers purchased variable annuities (VAs), thinking they would drive greater tax-deferred growth and earn more on retirement savings. But with high asset-based insurance fees and a limited selection of investment option, many of those annuities haven’t delivered.
“Many people bought variable annuities and neglected them”, says Aaron Grey of the fee-based advisory firm Denver Money Manager. “Now, years later, these VAs have consistently underperformed investor’s expectations”. Even worse, investors are often locked into their underperforming VAs due to high surrender charges, which penalize withdrawals made in the first five to seven years.
Today, Morningstar estimates that there is more than $1 trillion in retirement savings tied up in variable annuities.1 With asset based insurance fees averaging 1.35% of invested assets per year2, that means consumers are spending roughly $14 Billion each year on asset-based insurance fees alone.
The Solution: A New Category of Flat-Insurance Fee VAs
Fortunately, a tax-free 1035 exchange can allow you to take advantage of cost-saving innovations, such as no-load, no-surrender charge, flat-insurance fee VAs. Just as you might choose to save more of your hard-earned money by refinancing a high cost mortgage, loan or credit card, a tax-free 1035 exchange may allow you to save considerably more each year on your variable annuity.3
Faced with longer life spans and a failing retirement safety net, consumers need to save more. Once employer-sponsored plans and IRAs are maxed out, VAs are a powerful alternative for long-term tax-deferred investing. But, if traditional ‘old school’ variable annuities aren’t performing, a new flat-insurance fee VA might help you increase the power of tax-deferral so you can accumulate more and reach your savings goals faster.
The variable annuity Grey recommends most often has a flat-insurance fee of $20 per month, no matter how much you invest.4 On a $100,000 contract, that’s the difference between paying an average of $1,350 per year on a traditional variable annuity versus just $240 per year with a new Flat-Insurance-Fee VA. And this new model offers 5x more funds than the typical VA2, to help you better manage risk, adjust to business trends and market cycles to improve the performance potential of your retirement portfolio.
More Money for You – Not Your Insurance Company
By eliminating excess fees, these new Flat-Insurance Fee VAs have the potential to ‘buy back’ a lot of performance according to Grey. Rather than giving up 1.35% or more every year to the annuity company, that’s money you can re-invest into your account, giving you significantly more assets to compound and grow for retirement. “This is especially important in today’s low-return environment,” says Grey.
The way he sees it, a 1035 exchange simply makes sense for investors with underperforming VAs or anyone who’s currently in a variable annuity and paying too much.
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Laurence P. Greenberg is President and CEO of Jefferson National, which developed Monument Advisor, the first flat insurance fee variable annuity. See the impact fees and charges may actually have on your savings by taking the challenge at www.AnnuityRescueCenter.com. For more information or to receive a prospectus, visit www.jeffnat.com or call 1-866-WHY-FLAT (866-949-3528).
1 National Association of Variable Annuities (NAVA) and Morningstar quarterly data reported as of 12/31/2007.
2 Morningstar data as of 12/31/2007.
3 Before exchanging, please review the policy and prospectus to identify any penalties, surrender charges or loss of benefits that may pertain to your existing variable annuity contract. Please consult with a tax advisor for any potential tax consequences of switching from one variable annuity to another. Please note this is not an endorsement to switch from your current variable annuity. You should review your particular situation to determine which variable annuity is appropriate for your needs
4 Jefferson National’s Monument Advisor has a $20 flat insurance fee on more than 97% of our underlying funds. Certain funds also have a transaction fee ranging from $19.99 to $49.99 per transaction, depending on the number of transactions per year. See the prospectus for details. Like other variable annuities, the customer pays fees of the underlying funds selected plus the fees of any advisor hired.
Might be interesting if you did a 5-10-20 year look back comparing fixed annuities [both indexed and traditional] to the variable annuity. I believe the same issues as mutual fund investing will be found in variable annuities ie. lack of consumer ability to make reasonable investment decisions. I have been unable to find actual data or anyone that looks at actual data of real individual variable annuity performance like there is for mutual funds [Dalbar, Inc.] But I think it is a safe assumption that it would not be a better than mutual fund performance.
I have come to believe that indexing whether in mutual funds, ETFs, or variable annuities is simply based on assumptions and risk analysis that is wrong therefore not a place most people should be investing. The data is pretty strong for my assertion!
My 89 year old mother who has an IRA VA with Vanguard just recently opted to not annuitize it until she turns 99. I don’t really know much about non-annuitized annuities, but she says that when she dies my two brothers and I will be able to either take our share as a lump sum payment, take the funds out over a 5-year period or annuitize our share of the VA. I know that a portion of the VA is post tax dollars and some of it is pre-tax dollars so some tax would have to be paid at the time of withdrawal. I’m wondering if IRA VAs that are inherited have RMD for the named beneficiaries and if so is the RMD based on the decedent’s age or the beneficiary’s age?
One of the alleged benefits of a variable annuity is the tax deferral. VA salesman claim the added cost of the VA is offset by that benefit. Putting a VA inside an IRA is a questionable practice, it may run afoul of federal regulations. If not, it should.
Whatever the contents of a IRA, the IRA once inherited may be withdrawn over your lifetime, not your mom’s. The one thing to verify is that you are listed as beneficiaries. If you inherit via the will, then indeed the 5 year rule applies.