How to Shop for Variable Annuities

There are several options to buy variable annuities on your own, but understand the pros and cons before you do.

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Mary Kane September 30, 2019

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Vanguard's decision this summer to stop selling its low-fee variable annuity means one less option for investors who like to buy annuities directly, especially ones that are more complex than immediate annuities. You still have plenty of choices when shopping for a variable annuity, but carefully do your homework before locking up your money.

Variable annuities are part investment and part insurance, making them more complicated than some other kinds of annuities. With an immediate annuity, for example, you hand over a lump sum to an insurance company in exchange for a guaranteed monthly check. With a variable annuity, you put your money in mutual-fund-like accounts, and gains are tax-deferred until you withdraw the money or annuitize the account at the end of the contract. The products generally offer income guarantees, typically ranging in cost from 1% to 1.5% of the amount you invest.

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Vanguard’s variable annuity product was popular with a subset of investors who like to buy annuities directly instead of through advisers, says Kerry Pechter, editor of the Retirement Income Journal, in Emmaus, Pa. “It was something that was simple, straightforward and not hard to explain,” he says.

You can buy variable annuities through Fidelity, Schwab, Nationwide and other issuers. There are pros and cons you should consider. Your returns will vary depending on the performance of the investment options you choose, and it’s possible to lose money. Variable annuities grow tax-deferred, but when you withdraw money you’re taxed at ordinary income rates rather than lower capital-gains rates. And variable annuities don’t make sense for shorter-term investors—you may get hit with hefty taxes and surrender charges if you withdraw your money early.

A variable annuity is more appropriate for money you don’t need to access for many years, says Hersh Stern, founder of, an annuity shopping website. Variable annuities generated interest because of stock market gains over the past decade, Stern says. They now make up about 30% to 40% of the overall annuity market, he says.

Other Tax-Deferral Options

If you’re looking at a variable annuity mostly for its tax-deferral benefits, consider other strategies first, says Jeffrey Levine, chief executive officer of BluePrint Wealth Alliance, in Garden City, New York.

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Make sure you reach the maximum annual contribution limits for your 401(k) and IRA, and coordinate savings with your spouse, Levine says. If one spouse earns $200,000 and the other spouse brings in $25,000 part-time, consider deferring the lower-earning spouse’s entire salary to contribute as much as possible to the tax-deferred retirement accounts, he says.

If you decide to use a variable annuity, shop around to compare costs and options. Check the prospectus for details about fees and investment choices, and make sure you understand exactly how the product works. Also, you can cancel your contract without a surrender charge if you’re within the “free look” period, which is typically 10 days or more, depending on the state.

If you use an agent or adviser to buy a variable annuity, ask how that person is being paid, Levine says. An adviser who earns a commission may have an incentive to steer you to higher-cost products. A fee-based adviser may charge the client a fee for managing assets within the product itself, says Craig Hawley, head of Nationwide Advisory Solutions.

Also, decide what features are important to you. Options may include a rider for guaranteed income or to benefit heirs. If leaving a bigger legacy is a priority, it may be worth paying a little more to get a guaranteed death benefit, Hawley says. But watch out for costly options that are “sophisticated and richer” than what you are looking for, he says. The fewer bells and whistles an annuity has, the less it should cost.

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