For as quantitative as investing tends to be – with stock prices, dividend rates, interest yields, and countless other metrics – there’s an ever-important qualitative side that will always be dependent on the individual investor’s personality and goals. In this regard, investing should never be seen in a binary light of black-and-white but, rather, in a spectrum of shades of gray.

Few investments better represent this notion than the variable annuity. Reviled by some for their expenses and restrictions while openly embraced by others for their tax efficiency and possible guarantees, variable annuities very much embody the need for individual solutions for a variety of individual needs.

Variable Annuity Basics 

Available for both non-qualified and retirement assets, variable annuities are tax-deferred vehicles that allow investors to use market-driven vehicles – most often mutual funds – as a way of growing assets, establishing death benefits, or creating income streams for the future. Issued by insurance carriers, variable annuities are subject to vesting schedules that can severely limit liquidity over specific durations of time. If, for instance, an investor needs to liquidate a variable annuity while it’s still within a surrender period, the investor faces penalties from the carrier and possibly the IRS for the early distribution.

As confining as they might seem at first glance, variable annuities also afford investors the opportunity to purchase additional riders that can guarantee long-term growth, specific levels of income, or enhanced death benefits. These riders are strictly voluntary but can significantly increase the annual expenses involved.

Variable Annuities and the Psychology of Investing 

One of the unique features of a variable annuity involves those voluntary riders. Most investors understand that sticking with a suitable and appropriate allocation – in both good and bad times – will benefit them over the longer term. However, emotionally and psychologically absorbing market volatility – particularly when times are turbulent – is easier said than done. 

By using a guarantee rider within a variable annuity – perhaps a promised certain annual percentage of average growth if the policy is held to surrender – investors can actively participate in the market while still knowing that the insurance carrier will honor the rider and reward the investor for their patience. In this regard, investors can enjoy the peace of mind provided by a guaranteed level of growth if they abide by particular rules and restrictions.

As is often said, there is no such thing as a free lunch. So, as beneficial as a variable annuity rider might seem at first glance, it is critical that the investor fully understands the repercussions of the significantly higher fees and liquidity restrictions before investing in a variable annuity to begin with.

Are you looking for a guaranteed return or income stream? If used correctly, annuities can make sense for a portion of your portfolio. Or have you been sold an annuity that isn’t a good fit? Let us review yours to see if it makes sense or not. Simply click here or call (763) 445-2772 to schedule a complimentary consultation today!