Guaranteed Annuities: Not So Ironclad?

You would think that a financial product known as a “variable annuity with guaranteed minimum return,” would offer returns that are, well, guaranteed.

That’s not always the case, however.

Confused? For an explanation, MainStreet turned to Jeffrey Voudrie, a Certified Financial Planner and president of the Legacy Planning Group, Inc. in Johnson City, Tenn., to discuss the ways in which these investment products can fail to live up to their promises.

MainStreet (MS): What do many investors think they’re getting when they purchase a variable annuity with an income guarantee?

Jeffrey Voudrie (JV): Based on the investors that I’ve talked to, they come away believing that they are guaranteed a specific return, regardless of what the market does, and that they can access all of it after ten years. If that’s what these products actually provided I would put most of my clients in them!

MS: How do these annuities fall short of expectations?

JV: It’s the unexplained "gotchas" that create the problem. Investors enter into these thinking that market performance isn’t going to matter. Often, however, if they need to get at their money during the accumulation period, or don’t comply with every single provision in their contracts, their true return is going to be based on market performance—less some hefty annual fees.

MS: What can cause the income guarantees to be terminated or become invalid?

JV: The guarantees on the contracts I’ve seen are nullified if investors withdraw any money during the accumulation period, which typically is the first ten years of the contract, unless they begin another ten-year period under the contract. Some guarantees also can be voided if investors take out more than their calculated annual payments during the distribution period.