​Daniel Cullinane CPA                                   p 848-250-9587                                                                                                                                     


275  7TH Ave  7th floor New York , NY 10001                                                                                                                dcullinanecpa@yahoo.com

​                                                                                                                                                                                                     Chelsea / Lower Manhattan​​

By shopping around, you can find a top-rated insurer with a generous surrender charge.  For a fixed annuity, the key is the strength of the insurer.  Ask your agent if the company's claims-paying ability has been rated by Moody's, Standard & Poor's or Duff & Phelps; insist on either AA or AAA ratings.

Don't choose a fixed annuity just because the yield is high.  Yields can change over time. In fact, there are three types of fixed-annuity yields:

  • A fixed rate for the duration of the surrender charge.  A company that imposes surrender charges for the first seven years might offer a seven-year rate.  These often are the lowest yields, but they will give you the most protection.
  • Rates guaranteed for the first year or so.  These should be from an insurance company with a history of treating investors fairly on renewals.
  • "Bait-and-switch" rates.  These are one-year guarantees from insurance companies that don't act reputably.  An initial 7% rate might go to 3% the second year.  Yet you are locked in with 10 years' worth of surrender charges.

​Recommendations: Check an insurer's history of renewal rates as well as its financial strength.

For variable annuities, the insurer's strength isn't so important because variable annuity accounts are separate accounts, not commingled with the insurer's funds and not vulnerable to its creditors.  Instead, you want a variable annuity with a good performance record, especially in its stock funds.  Low fees can make a difference, too.  No-load mutual fund families such as Vanguard, T. Rowe Price and Charles Schwab offer variable annuities with relatively low fees and expenses.

Variable annuities are a tax-sheltered way to invest in mutual funds, but they have higher fees than mutual funds.  The conventional wisdom is: A mutual fund with securities earning 10% a year will return 9% to investors, after expenses, while a comparable variable annuity will credit investors with 8%.  However, the conventional wisdom may be wrong.  Variable annuity separate accounts may outperform mutual funds in some circumstances because of the following factors:

  • Stability.  Variable annuities discourage redemptions with tax penalties and early surrender charges.  Therefore, the managers of annuity stock funds don't need to keep low-yielding cash equivalents on hand in case of redemptions.  Moreover, they aren't hit with massive redemptions, when the market drops, that would force them to sell at low prices.  Instead, variable annuity fund managers can use new premiums to buy stocks when prices are low.
  • Size.  Most variable annuity stock funds are relatively small, perhaps only a few million dollars.  Mutual funds, on the other hand, commonly hold portfolios that run into the hundreds of millions of dollars, and some into the billions.  It's easier to manage a small portfolio than a large one.
  • Superior managers.  The mutual fund families encompass many funds, whose managers range from poor to excellent.  Variable annuities, though, are typically offered by insurance companies, which choose the managers who have performed the best in bull and bear markets.  With a variable annuity, your money will likely be in the hands of a proven stock picker.

​With Nationwide's Best of America annuity, for example, in the past you've been able to choose among funds managed by American Century, Credit Suisse, Dreyfus, Fidelity, Janus, J.P. Morgan, Oppenheimer and Van Kampen.  Many other variable annuities offer stock funds managed by the same people who manage mutual funds with four-star and five-star ratings by Morningstar, Inc.


As variable annuity issuers compete for investors, they are adding new features: for example, bonus annuities and long-term care insurance.

Bonus annuities put extra cash into your account when you sign a contract.  For example, if you're entitled to a 5% bonus for every $10,000 you invest, you receive $10,500 in your account right away.  Nonetheless, bonus variable annuities usually have drawbacks:

  • Extended surrender charges, which might be in effect for nine or 10 years, declining from 8,5%, while traditional variable annuities impose surrender charges for seven years, starting at 7%.
  • Lower guaranteed death benefits, such as the greater of the contract value or the premiums paid.  Other variable annuities commonly ratchet up the minimum death benefit over time.
  • Higher costs.  Bonus variable annuities usually charge an extra 30 to 65 basis points (0.30% to 0.65%) per year.  Long term, paying an extra 30 to 65 basis points a year may cost you more than the value of an upfront bonus of 3% to 5%.

​Therefore, if you already own a variable annuity and are satisfied with it, you're probably better off staying put.  If you're shopping for a new variable annuity, don't buy a bonus annuity before comparing it with other types, perhaps a low-cost version from a company such as TIAA-CREF.

A bonus annuity may make sense if you want to upgrade from an older annuity where surrender charges still apply.  Similarly, a bonus annuity might work if you have been locked into a fixed annuity and want to switch to a variable annuity for potentially greater returns.  In these situations, the bonus can offset the surrender charge incurred in switching annuities.

Long-term care (LTC) insurance may be offered as an added feature with some variable annuities.  In some cases, you are guaranteed at least a return of your principal, through annuity payments, and a single upfront premium buys a paid-up LTC insurance policy as well.  Thus, you can receive an income from the annuity and LTC benefits at the same time.

Some variable annuities take other approaches to long-term care.  They may allow you to make withdrawals for needed care, free of surrender charges, and gain access to elder care information as well as discounts from retain providers.

These features have been added to variable annuities in the past few years.  Other products are likely to appear, offering still more benefits, as the demand foe LTC coverage increases.  If you're interested in such a package, visit the Nationwide and John Hancock web sites (www.nationwide.com and www.johnhancock.com) and talk with your financial adviser.


Variable annuities generally provided investors with satisfactory returns during the bull market of the late 1990s.  However, during 2000-2002, and again in 2008-2009, many equity subaccounts lost value.

During the bear market, variable annuities began to downplay performance and emphasize guarantees.  Thereforem you (and your beneficiary)have some protection against poor subaccount performance.  Nevertheless, you should look for variable annuities with subaccounts that have performed relatively well.

Caution: You don't necessarily want the fund that ranked No. 1 in the past; that's not a reliable indicator of future performance.  But you do want to see a strong long-term record.

Mornignstar Inc. publishes the Lipper and Morningstar Variable Annuity Report and up-to-date variable annuity ratings.  For more information, go to www.morningstar.com

You can also track past performance through your financial adviser.  Just make sure that you have access to a stock fund with a good track record before investing (or keeping your money) in a variable annuity.  Also, keep monitoring its performance after you invest.  If the fund you're chosen heads south sometime in the future, you may want to switch to a better-performing annuity.