How Safe are Variable Annuities

Variable annuities are actually among the safest retirement investments around. There are some risks and potential risks associated with these investments that you should be aware of. Fortunately these risks can be mitigated or avoided with prudent investment.

Variable Annuities Explained

A variable annuity is a hybrid investment that combines a traditional fixed-rate annuity and a sub account through which money is invested in vehicles such as exchange-traded funds or mutual funds. The idea behind this is to create a regular source of retirement income that can grow in size over time. Any gains from the sub account are automatically invested in the annuity to increase its size.

This provides protection against inflation and a secure investment that is backed by an insurance company. It also provides some protection from taxes because annuities are tax-deferred. A big advantage to annuities is that the IRS places no limits on the amounts you can invest in one.

Something you should be aware of is that the Securities and Exchange Commission or SEC considers variable annuities to be equities and not insurance products. All that really means is that the SEC has authority to regulate these products. That may actually add an increased layer of protection by offering more transparency and disclosure. The SEC requires that prospectuses and other documents be made available for all equities it regulates.

A Very Safe Investment

Even though they are misunderstood and disliked by the investment industry variable annuities are actually a very safe retirement investment. Most of the 401k plans that non-profit organizations and educational institutions offer to their employees are really variable annuities. These plans are offered by companies like TIAA-CREF and these organizations use them because of the security they offer. So many more Americans rely on these vehicles for retirement income than you might think.

The reason for this is that the annuities are a safe investment that guarantees income. Unlike a traditional 401k or IRA a variable annuity is partially guaranteed by state governments. All fifty state governments and the District of Columbia (Washington DC) guarantee at least a portion of annuity funds. Most states guarantee annuities for up to $100,000 some states such as Connecticut and New York guarantee them for up to $250,000.

This guarantee means that the state will pay back at least a portion of the money if the insurance company that backs the plan goes out of business. It should be noted here that the collapse of a major insurance company is not likely. Most large insurers have been able to survive numerous catastrophes including the Civil War, the Great Depression, two world wars, the Cold War and the Financial Crisis of 2008. If one were about to collapse the federal government would probably step in and bail it out as happened with AIG in 2008.

State governments also regulate insurance companies and state insurance commissioners actually have the power to liquidate insurers and transfer their assets and policies to more secure companies. That means if the Fly By Night Insurance Company collapsed any annuities it sold could be moved to another insurer or simply guaranteed by the state.

The truth is that variable annuities are a very safe retirement investment protected and guaranteed by a number of safeguards. The chances of an investor not getting his or her funds back from one used properly are slight.