Variable Annuities for the Family Man
For today’s family man, making the right financial decisions is more critical than ever. It’s no longer enough to follow the prescribed formulas for building a sound financial plan. Planning for the future in the face of uncertain economic conditions and volatile markets requires a bit more foresight and a little sophistication in order to optimize a financial plan for achieving the family’s goals while protecting their assets. In the right circumstances a variable annuity may be the piece of the puzzle a family man needs.
The best circumstance in which to consider adding a variable annuity to a financial portfolio is the very beginning stage of starting a family. The family man who has the future of his children at heart , the security of his family in mind, and the foresight to plan for all contingencies has a wealth of planning options at his disposal.
Consider the long term financial goals and contingencies that must be addressed by a family man today:
- Protect the family against the loss of income due to a premature death or disability
- Secure a steady stream of retirement income.
- Build a college fund that will provide for a significant portion of the children’s college expenses.
In sequence, the young family man should purchase a permanent life insurance policy (with a death benefit of at least 10x annual earnings), begin contributing to a qualified retirement account, and establish a college fund. For a family man in the early stage of his earning years, funding these essential needs is likely to leave very little for additional savings.
The key to successful long term planning is to begin funding the essential needs as early as possible. A man in his late twenties or early thirties can use the advantages of lower costs of life insurance and the time value of money to keep his funding requirements very low.
With his financial foundation established, the family man can turn his attention to building and protecting wealth that will move him and his family closer to the ultimate dream of attaining true financial independence. This is where the variable annuity can play a key role.
A Variable Annuity as a Wealth Protection Vehicle
As his earnings increase, producing additional savings capacity, he can begin to allocate funds to growth oriented investments that can, potentially, achieve greater returns. Investments in equity-based vehicles, while riskier, can produce returns that will enable his money to work harder to outpace inflation. The risk associated with equity investments can be mitigated through diversification, professional management, dollar cost averaging, and time.
While there are many different wealth building options available, and prudence dictates using several in a wealth building strategy, the variable annuity is the only one that provides a wealth protection component that, in today’s uncertain environment, can insure against the loss of asset value in the event of death.
One of the real impediments to wealth accumulation is taxes. Money that is allowed to grow unencumbered by taxes can grow faster. Taxes on the accumulation inside a variable annuity are deferred until they are withdrawn at which time they are taxed as ordinary income. The key is to delay any withdrawals until such time as you are in a lower tax bracket.
Another key to long term wealth accumulation is proper diversification among several investment categories and sound management of the portfolios. Variable annuities use managed accounts, similar to mutual funds, which enable the investor to achieve diversification, balanced asset allocation and the benefits of professional management.
A variable annuity is an insurance contract with a Guaranteed Minimum Death Benefit (GMDB), whereby a life insurance company guarantees the principle value as a death benefit. In the event of a premature death, the family will never receive less than the original investment into the annuity. Consider this security feature in light of the recent historic declines in the stock market where 401(k) accounts lost as much as 50% of their value.
In some variable annuity contracts, the GMDB is tied to a minimum rate of increase or to a percent of accumulated values that allow the death benefit to increase beyond the principle amount so that it truly protects the family beneficiaries against stock market and interest rate risks.
The other advantage of variable annuity contracts is that, when it is converted into a lifetime income stream, the income is adjusted annually to reflect any gains in the underlying investments, again a guard against inflation. Conversely, down markets will cause the income payout to drop. This is why it is recommended to delay converting a variable annuity to income as long as possible and, to reduce risk exposure by adopting a more conservative asset allocation as you approach retirement age.
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Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.Speak with an advisor over the phone about annuities for FREE.
Look Before You Leap
There are some downsides to a variable annuity that should be considered. First, there are expenses unique to variable annuities that can affect accumulation growth. The average amount of expense charges in a variable annuity are 2.3% compared to 1.4% in a mutual fund. Many variable annuity owners see the difference as a fair price to pay for the added security it provides.
It’s not a liquid investment. There are early surrender charges that are applied to early withdrawals, and the IRS will penalize withdrawals at 10% prior to age 59 ½ which underscores the importance of going into a variable annuity with a long term horizon.
Variable annuities are offered by prospectus which means there is an opportunity to carefully study and compare the charges, withdrawal provisions, and account management performance history. Understanding the risks and charges going in will enable you to determine the real cost of ownership of a variable annuity as compared to similar investments.
For the family man with a long term horizon, the foresight to secure his family’s most essential needs, and with an eye towards accumulating and preserving wealth, the true cost of ownership of a variable annuity can be very favorable.
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