Battle Royale #1: Variable v. Index Annuities

Battle Royale Variable vs. Index Annuities

It’s a battle royale today, here at the Olympic Auditorium. The strong-willed but volatile champ, Variable, will be challenged by the hot and steady challenger, Index.

Anybody remember the Olympic? It’s the L.A. arena where all the 60s and 70s matches were fought. I grew up in SoCal, so maybe it’s just a Cali thing.

Anyway, you really can’t compare a variable annuity (VA) to an index annuity (IA). A VA actually owns investments inside the subaccounts. Their values can go up or down just like mutual funds’ values.
An IA has no subaccounts, and owns mostly fixed income investments like bonds. IAs also own stock market options with a small chunk of the funds in the account.

However, all things considered, which of the two do I think is the best overall product? Let’s go to the Q&A session for more information. This week’s champ will face the winner of next week’s Fixed v. Immediate battle, which is sure to be an old-time cage match!

How do interest rates determine annuity type?

IAs are based primarily on bond yields, and rates are at all-time lows. VAs are based mostly on the equity markets. As a result, buying an IA today will bring minimal returns.

Why are the penalty periods longer for IAs?

Good question. It’s a way to recoup the upfront bonuses given to annuity buyers. Don’t fall for it. No bonus is worth an extra-long surrender charge!

How do you compare the income withdrawal features between the two?

Another good question. I think the income options might be a little bit better with IAs because there is less risk in the portfolio. However, upside appreciation exists much more in VAs.

Which product has lower fees?

Both products are known for excessive internal fees. The fees for IAs may be lower because it’s cheaper to insure an IA as opposed to a VA.

Are VAs too risky?

Only too risky for the folks who don’t have other safe funds. With a death benefit, diverse investment models and guaranteed income features, VAs should not be deemed risky.

And the winner is: Variable Annuities. VAs, in my opinion, offer more upside, have shorter penalties, and give better investment options than IAs. Yes, there’s a little more risk, but the risk is very manageable.

Pay-it Forward:

This young generation will need talented sales people because most are avoiding sales jobs like the plague. To be a good salesman you need to be a good communicator and to be persistent. Stress writing and verbal skills with your kids. And make sure they try, and try some more!

Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

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About the author

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

More posts by | Visit the site of Earl E Bird

 
 
 
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