Protection for a Price

The biggest financial worry among investors this year is that their investments will “get clobbered,” according to a late 2009 poll.¹ So it’s not surprising that 74% of investors said a guarantee was “extremely” or “very” important when choosing an investment.²

A guaranteed investment? Actually, it’s no joke. Variable annuities, which are insurance contracts that offer an opportunity to pursue investment gains, give contract holders the ability to purchase guarantees to help protect against downside risks. Although the guarantees come at a price, consider the potential value of these benefits.

Guaranteed minimum accumulation. Regardless of the performance of the underlying investments, the contract value will maintain a minimum level after a specified term. This level is usually equal to the amount of premiums paid.

Guaranteed minimum income. When the annuity owner begins taking retirement income, the payment will be based on the greater of either the actual contract value or a minimum payment amount.

Guaranteed minimum withdrawals. A fixed percentage (usually between 5% and 7%) of the annuity premiums can be withdrawn annually for a specified period (including the owner’s lifetime), regardless of market performance.

There are contract limitations, fees, and charges associated with variable annuities, which can include mortality and expense risk charges, sales and surrender charges, administrative fees, and charges for optional benefits. Withdrawals reduce annuity contract benefits and values. Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.

Withdrawals of annuity earnings are taxed as ordinary income and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 59½. Any guarantees are contingent on the claims-paying ability of the issuing company. The investment return and principal value of an investment option are not guaranteed. Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered.

Variable annuities are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Money, December 2009
2) InvestmentNews, June 22, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.