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Variable Annuities are sold, not bought. The cons:

1) A mortality charge that is often 10x the true cost.
(500K of 10 yr term insurance might cost you $1200/yr at age 60. This is .24%. But consider, even after a bad crash, the stock market will not go to zero. You can safely insure yourself by having term insurance for 1/3 to 1/2 the value of your portfolio. And when you die, it will pay off even if the market is up). Check the mortality charge on the annuity you are looking at.

2) Most annuities have surrender fees, as high as 10% the first year, declining over a ten year period.

3) The initial fee to the seller is likely near 5%.

4) The gains on the annuity do not get stepped up basis on your death, it's just like inheriting an IRA.

5) The investment choices within the annuity are limited.

6) The gains at withdrawal are taxed at ordinary income rates, while an investment in a taxable account are taxed at favorable dividend and long term cap gain rates.

7) Even if you choose a no-surrender fee, low cost, fund (say one offered by Fidelity), the effect of (6) above negates any tax deferral advantage over time.

8) Even after the surrender fee has passed, there are pre-62 penalties for early withdrawal.


Scott Burns (<<LINK to the article) just published another article confirming my thoughts.

I was told that (2) and (3) are outdated, only to have someone write to me, pointing to an annuity which contained a 1.25% mortality and expense risk fee, exactly 10X what my insurance example above shows. (To be clear, a $1M account would have mortality charges of $12,500 vs $1200 for a $500K term policy) Also, a surrender fee up to 7% for the first 7 years. There were still fees for the underlying funds, up to 3.2% per year. (continued)