Variable Annuity Questions to Ask

In my last post, I provided a guide to help you understand all of the fees you might be paying if you own a variable annuity. I hope this provides some clarity around what you actually own and how a variable annuity is designed.

Today, I’ve put together a list of variable annuity questions to ask a person who is trying to sell you an annuity. Given the $140 billion in variable annuities that are sold every year, it’s likely that you’ll be solicited to buy an annuity at least once during your lifetime.

Next time that happens, you’ll be armed and ready with the questions I’ve outlined below!

Variable Annuities Show What’s Wrong with Financial Advice Today

As a side note, this post gets to the heart of what’s wrong with most “financial advice” being given today:

  1. The so-called “advice” isn’t advice at all. It’s simply the sharing of information in order to sell you a product (no different than the “advice” you receive from a car salesperson at the dealership)
  2. The “advice” isn’t focused on identifying your true needs or solving your problems
  3. The “advice” is riddled with conflicts of interest (because the person giving you the “advice” is not a fiduciary)
  4. The “advice” isn’t based on research, evidence, or data. It’s based on the big commission that the seller knows will come through after the sale.

It frustrates me that this remains the experience that most Americans encounter when they think of working with a “financial advisor.” However, things are changing and investors have greater access to fiduciary advice than ever before. Hopefully that momentum continues.

Now let’s get to the questions!

Questions you Should Ask the Person Who is Trying to Sell you a Variable Annuity

In the event your financial advisor or insurance guy is trying to to sell you a variable annuity, here are a list of questions I recommend you ask them:

  1. What is the total compensation (i.e. commission) you will receive from selling me this product? Do you consider that a conflict of interest?
  2. For qualified annuities: Can you please tell me why it is appropriate to place a variable annuity inside an IRA? An IRA is a tax advantaged account, thus the tax-deferral of a variable annuity provides no additional benefit.
  3. For non-qualified annuities: Have I maximized all of my other tax-advantaged accounts (401k, IRA, SEP IRA, etc.) already? If not, shouldn’t I invest in those first before I even consider a variable annuity?
  4. Can you please provide a straightforward summary of the total annual costs associated with the variable annuity? Also, please provide details on the exact benefit that each expense is supposed to provide me. This summary should should include each cost on a percentage of assets basis and a dollar basis (calculated against the initial recommended investment) to make it very clear what the total annual costs of the annuity are.
  5. For annuities being sold with a death benefit: If the account value is greater than or equal to the purchase payments less the withdrawals at the time of death, does the death benefit provide any value to me?
  6. For annuities being sold with a death benefit: How does the death benefit integrate with my existing life insurance coverage and any other life insurance needs I have? Is the death benefit necessary given my existing and future anticipated liabilities? Have we looked at cheaper alternatives like term life insurance?
  7. How does the recommended sub-account investment fit within my overall asset allocation? How do the fees compare to low-cost, no-load index mutual funds like those from Vanguard?
  8. If the goal is to annuitize part of my portfolio at some future date, shouldn’t we consider a lower cost single-premium immediate annuity?

The One Question that Will Probably Kill the Sale

If you don’t feel like asking these questions or you’re getting curious answers from the person trying to sell you the annuity, this is what I recommend you do:

Ask the person to print out (single sided of course) the prospectus for the annuity and walk you through it one page at a time.

Since the typical variable annuity prospectus is 300 to 700 pages long, the salesperson will almost certainly stumble through their pitch when you ask them this question. More than likely, they’ll back down from the sale when they realize how ridiculous such an exercise is and that you are, in fact, an informed consumer.

If all else fails, please contact me or another fee-only, fiduciary financial advisor before signing anything! I am more than happy to provide a second opinion with no obligation on your part.

Recommended Posts