Performance Guaranteed Variable Annuities

After the market collapse I was getting grief from some individuals that I talked out of purchasing variable annuities with a minimum guaranteed rate of return.  The annuities go by many names and are different in their benefits and features across companies.  The bottom line is that they all guarantee a minimum rate of return no matter what the performance of the underling funds you select.  This made many individuals pick some of the riskiest investments offered in the product.  The philosophy was that by going into the riskiest funds you had unlimited upside potential but the downside risk is a guaranteed minimum return by the company of 6-7 percent. 

So why would I not recommend this product to investors?  Number one is you have to read the fine print in all of these annuities and there is a lot of it.  None that I know of would actually let you take the entire balance out of the fund.  Most allow you to collect income off the accumulation.  Two, with most of them you have to hold them for a ten to fifteen year period.  If you held a well diversified portfolio of stocks, bonds and other assets for the same period of time there a few periods in history that the annuity guarantee would be needed.  So you paid for the guarantee in the form of higher fees for no reason most of the time.  Lastly, the guarantee is backed by the insurance company who may not be able to keep its promise. 

It turns out that my last reason should be the biggest concern for those who own these annuities.  A recent Wall Street Journal article, “Investing in Funds: A Quarterly Analysis-Brokers Fear Many Insurers Ignorant of Annuity Risk” points out that the rating agencies are downgrading the ratings of many of the insurance companies who sold these annuities. 

I do not want to spread fear and panic like Jim Cramer or Suze Orman last October, but you should be concerned.  There is little chance you will lose all of your money in one of these annuities.  The more likely scenario is that you do not get the guaranteed rate of return, but will get the balance in your account with the market losses.  This would mean that you paid higher fees for investing than you would of in just mutual funds without the annuity rapper.

Hopefully everyone is learning from this downturn.  There is no guy (Madoff and others) out there that can defy the laws of investing with above average returns without volatility. There will be no product out there (performance guaranteed variable annuities) that can give you the upside potential of riskier investment without the downside risk. 

In hindsight I stand by my recommendation to those individuals who I told to stay away from those annuities.