Your Finance: Variable annuities

Average prices may be 5 percent more in

Average prices may be 5 percent more in some areas Photo Credit: HealthDay

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The variable annuity market has been sending mixed signals. Sales are down, several key players have exited the market, yet assets in these insurance products reached an all-time high of $1.61 trillion in the first quarter of the year.

Variable annuities are a mashup of life insurance, mutual funds, and tax-deferred retirement plans. A typical deferred variable annuity conveys a death benefit, allows the purchaser to invest in a variety of mutual fund-like sub accounts, get tax deferral on account income until the proceeds are cashed out, and then take a guaranteed monthly payment after retirement.

Investors who simply bail out of their annuities risk getting hit with surrender charges on top of a huge income tax hit. But trading into a new annuity can avoid those problems. You may, in fact, have a salesperson pushing you to make such a trade.

Hence, the question: Should you stick with what you've got or trade? Here are some pointers:

Your old annuity might actually be better than a new annuity.

"Variable annuities today are more expensive than they were 10 years ago," observes Michael Kitces, a Columbia, Md., fee-only financial adviser. Newer plans also have more rules about how account holders can invest their money.

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How safe is your insurer? Five of the top 20 variable annuity companies -- Sun Life Financial Inc., The Hartford Financial Services Group Inc., Jackson National Life Insurance Co., ING and MetLife Inc. -- are either dialing back their variable annuity exposure or getting out altogether. That doesn't mean any individual company is on the verge of default. But it can't hurt to check the ratings and viability of the company that is holding on to your retirement dreams.

Follow the fees. Even though new annuities charge more for benefits like the lifetime income riders, they may charge less in management fees. So comparison-shop your variable annuity against low-cost providers like Charles Schwab Corp., Vanguard and Jefferson National.

Figure out what generation you are in. Variable annuities went through several different iterations. People who bought in the mid-1990s might have generous payouts. Those who bought in 2009 may have seen their cash value outpace the guarantees in their plan.

Policies sold in 2007 and 2008 had varying rules in terms of how much of a base they would guarantee; some ratchet up every year automatically, others don't. So check the specific details of your contract.

You can switch into a different product. Tax law allows annuity holders to trade their old plan for a different kind of policy under what's called a "Section 1035 exchange" and still avoid getting hit with income taxes.

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