Kansas City, MO: For investors with a lump sum and wanting guaranteed income, variable annuities might seem like the perfect option. But as many investors are learning, money in a variable annuity might not necessarily mean guaranteed income. For some investors, such as elderly investors or those nearing retirement, variable annuities might be entirely unsuitable.
The issue is that people who purchased variable annuities have been asked by the insurance company issuing the annuity to either never cash in the annuity ‑ meaning, never receive the periodic payments they set up with the annuity ‑ or have been asked to put more money into the annuity. The problem is that variable annuities are sold with the promise of a guaranteed lifetime stream of income. So people buy variable annuities with the idea that when they retire, they will have a guaranteed income. But if the company that offers those annuities does not have the ability to make its financial obligations, investors are the ones left without their money.
According to the New York Times (7/12/13), some insurance companies that offered extravagant income or death benefits have found that with low interest rates, it’s more difficult to meet the guaranteed returns. To stem the financial problems, companies have asked investors to either be bought out or to switch to an investment that has lower returns. Clients that do not agree to either a buyout or a different investment could lose their guaranteed income.
Many people who are at or approaching retirement age consider putting their money in a variable annuity because of the guaranteed income and because they are sold as being relatively safe. One of the situations in which people buy a variable annuity is when their pension is paid out in a lump sum, rather than a monthly payment. Taking the money as a lump sum has its benefits in that administrative costs are generally avoided and the employee can do what he or she likes with the money, such as invest it. In some cases, that lump sum is then put into a variable annuity without considering the additional fees and the risk if the company cannot meet its annuity obligations.
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