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The Annuity World Gets a Little Prettier

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The folks at Genworth (NYSE: GNW  ) may have done us all a big favor. They did so for the wrong reason, in my opinion, but their decision's still a win for consumers.

Genworth recently discontinued its sales of variable annuities. Its reasoning is purely financial: They haven't been selling well. Genworth sold $151 million worth of annuities in the third quarter of 2010, down 30% from a year earlier. Some other annuities are also being discontinued, until their markets "develop further." (Previously sold variable annuity policies that remain in effect will be maintained.)

Whatever the reason for the discontinuation, I'm glad it happened. Variable annuities generally just stink. They tend to carry high annual fees of as much as 3.5%. They can also lock your money up for a long time, charging you hefty penalties if you want out. Even their tax advantage is iffy. The earnings in the annuity will grow tax-deferred, but they'll eventually be taxed at your income tax rate, which currently goes as high as 35%. Compare that with dividend-paying stocks, for which dividend income and long-term capital gains are currently taxed at 15% for most people.

Worse yet, some insurers are now requiring variable annuities buyers to invest at least 30% in bond funds. That mandate limits buyers' upside potential, since stocks generally outperform bonds.

Stay wary
Unfortunately, insurers are not shutting down variable annuities in droves. Overall, sales of the product through financial institutions are actually rising at a rapid pace.

The top variable annuity sellers include Prudential (NYSE: PRU  ) and MetLife (NYSE: MET  ) . Prudential sold $15.6 billion in annuities last year through the third quarter, while MetLife sold $13.2 billion. Hartford Financial (NYSE: HIG  ) , which used to be one of the top sellers, retooled its offerings to be more conservative; its sales have since plunged to 20th place in the industry. Instead of discontinuing those products, however, Hartford will likely retool again.

If you're looking for investments to support your retirement, think twice or thrice before opting for ugly variable annuities. Most of us would be better served by fixed annuities or strong dividend-paying stocks. Learn more about sound retirement-planning strategies in our Rule Your Retirement service.

Want to retire rich? Read the Fool's new special report, The 7 Secrets to Salvage Your Retirement Today.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.


Read/Post Comments (8) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2011, at 3:49 PM, agelessrockstar wrote:

    In this bullish time, it's easy to overlook the state of the economy in late 2008 when even the stalwart of dividend-payers GE cut its dividend by 60% after increasing or holding its dividends for FORTY YEARS!! (I owned GE stock then, and still do) It eas a scary time. I'll take my 25% return (since 2009) in my Prudential variable annuity, thank you, and be happy that I've diversified my portfolio to include "safer" 7% annual income instruments (like those stinking variable annuities), along with dividend stocks, growth stocks, bonds, and cash. After all, my retirement is at stake!

  • Report this Comment On January 11, 2011, at 4:00 PM, agelessrockstar wrote:

    In this bullish time, it's easy to overlook the state of the economy in late 2008 when even the stalwart of dividend-payers GE cut its dividend by 60% after increasing or holding its dividends for FORTY YEARS!! (I owned GE stock then, and still do) It was a scary time. I'll take my 25% return (since 2009) in my Prudential variable annuity, thank you, and be happy that I've diversified my portfolio to include "safer" 7% annual income instruments (like those stinking variable annuities), along with dividend stocks, growth stocks, bonds, and cash. After all, my retirement is at stake!

    Note: Sorry. I may be older, but I can still spell.... eas = was

  • Report this Comment On January 11, 2011, at 4:12 PM, danow67 wrote:

    I think your “blanket statement” comments are irresponsible to the investor that may come across your article. When it comes to cost, you get what you pay for. Many annuity products are expensive. The question is compared to what. Go ahead and buy dividend producing stocks and fixed annuities. Many companies in rough times lowered or even eliminated dividends. Good luck getting a fixed annuity with a rate of over 2-3%. How comfortable are you that capital gains rates are not going up in the future? Most Variable Annuity money is qualified money that has never been taxed and is earmarked for retirement income. Why do you think there are restrictions on Variable Annuity investments now? Perhaps because people where too greedy and because they had a guarantee put themselves at too much risk with investments more heavily weighted in equities then they should have been. The surviving Variable Annuity companies are helping everyone involved be a more prudent investor for the long run. Back to cost. Look at the car industry. You can spend $10k on a car or $100K. both get you from point a to b. The features and more importantly the benefits get you there with more comfort, piece of mind, reliability and safety. That’s what people are willing to pay for with these so called solutions that you say “stink” You can’t rely on Social Security or a pension so it’s up to the individual to create a lifetime income stream with the flexibility afforded with the benefits of today’s variable annuities. People want certainty, piece of mind and an income stream they can’t out live.

  • Report this Comment On January 12, 2011, at 9:36 AM, Wilson08 wrote:

    This is one of the poorest articles I've read. You clearly have never managed retirement income for anyone. You have no useful knowledge of the topic you are writing about.

    If you would like to be educated, feel free to get in touch.

  • Report this Comment On January 12, 2011, at 12:18 PM, spartan29 wrote:

    This just might be to most uneducated article I have ever read. To think that there are "Financial Reporters" who actually who give advice such as this is frighthening. I would rather take my chance with veteran financial advisors who have been educated properly vs listening to some idiot who probably has no formal training in the area. Shame on you for not truly showing the pros and cons of such product. There are pros and cons to all vehicles such as this and "fees" are not the only feature that make a product good or bad. The fact that many of these companies and procucts give you the opportunity to get the upside (albeit for a higer cost) but your DOWNSIDE income is proteced makes variable annuitied very attractive. As my little kids would say...DUH!!!

    I would advise Selena get a job writing obits. Remember what the say about opinions! Opinions are like .......... everyone has one.

  • Report this Comment On January 12, 2011, at 12:22 PM, spartan29 wrote:

    Oh wait...A degree on Anthropology and Teaching as well as an MBA absolutely give you the credentials to give financial advice! Note the sarcasm.

  • Report this Comment On January 12, 2011, at 3:10 PM, laptop3 wrote:

    Sorry Selena, but your bashing of the variable annuity products reflects your lack of understanding of what the recent market has to offer. First of all, do you know what fixed annuities are paying? The rates are horrendous. The guarantees provided within the current variable annuities prove to be much more attractive compared to fixed products.

    I'll admit, annuities 10 years ago were not the best for putting funds into; however, within the last couple of years the variable annuities have become much stronger when you look at all of the guarantees provided as a living benefit for both the individual and spouse.

    The one thing you failed to address in this article is that everyone has different lifelong goals; you appeared to generalize that variable annuities are ugly products in every circumstance. You may be right in certain cases, but misleading in other instances. Annuities are not a place to put all of one's retirement funds, but a portion of them such that an individual can create a stream of income during retirement.

  • Report this Comment On March 07, 2011, at 10:53 AM, augbarb wrote:

    Selena, you should join CNBC. You fit right in. My variable annuity with a low fee company has a value six times more than my IRA throughout the years. The annuity has gained five times in value from my cost basis.

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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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