Email this page Format for printing Reuse/Reprint
	Related Links Discount Brokerage Center Annuities Retirement The Motley Fool Money Guide
	Discussion Boards Discuss This Column Ask a Foolish Question

By Selena Maranjian (TMF Selena)
June 28, 2002

Q. Are variable annuities good investments?

A. Insurance salesmen often push these mutual fund-like instruments (which generate hefty commissions). Although there are now some more-attractive-than-those-of-yesteryear annuities out there, in general annuities usually aren't the wonder-investments they're cracked up to be. Here are some reasons why:

• Variable annuity fees can be steep. They'll typically scarf up more than 2% of your holdings each year, according to Morningstar. That's negative growth. On a $50,000 account, you'd be forking over some $1,000 annually.
• It often takes at least 15 years before the performance of your variable annuity will match the after-tax returns of investments in a taxable account. You'll be tying up your money for a long time.
• The "death benefit" that will pay your beneficiaries at least as much as you put in to the annuity is often a selling point. But it frequently costs more than it's worth. Long-term investments in good stocks are likely to increase, not just maintain, their value.
• If you don't draw out the money before you die, your beneficiaries will be taxed on it. Mutual funds and individual stocks should cost your heirs a lot less.
• As with instruments such as IRAs, if you withdraw funds before age 59 1/2, you'll be charged a 10% penalty. Better be sure you won't need that money soon.
• Variable annuities offer the option of annual payments. But you could achieve annual income effectively in other ways, such as by selling off small portions of stock holdings each year or investing in other income-producing securities.

Plans such as 401(k)s and IRAs are generally more effective for socking away money for retirement. Consider maxing those out before looking at variable annuities. Take the time to learn more about annuities before plunking any money into one.

Learn more in our Annuities and Retirement areas -- and from an even weightier source: The Securities and Exchange Commission. For additional, albeit less objective, information, drop by Variable Annuities Online, Insure.com, and the National Association for Variable Annuities.

If you have any questions, thoughts or opinions on this topic, share them with others on our discussion board for Ask the Fool.

This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.