Suze Orman, a renowned financial expert, has expressed her disapproval of variable annuities in several instances. Here’s a summary of her views on variable annuities, along with insights from other sources:
Suze Orman’s Dislike for Variable Annuities:
- High Fees: Variable annuities typically come with high fees, including mortality and surrender charges, which can significantly reduce your returns. These fees can be as high as 3% or more annually.
- Tax Inefficiency: While the growth within a variable annuity is tax-deferred, withdrawals are taxed as ordinary income, unlike investments held outside an annuity, which may be subject to capital gains taxes. This can lead to a higher tax burden.
- Limited Investment Options: Variable annuities often have a limited range of investment options, which may not align with your risk tolerance or investment goals.
- Mortality and Surrender Charges: Variable annuities often impose surrender charges if you withdraw your money before a certain period, typically 5-7 years. Additionally, there may be a mortality charge that reduces the death benefit for beneficiaries.
Suze Orman’s Preferred Alternatives:
- Index Funds or ETFs: Suze Orman recommends investing in low-cost index funds or ETFs, which offer diversification and potentially higher returns compared to variable annuities. These investments also have lower fees and no surrender charges.
- Individual Stocks: For experienced investors, Suze Orman suggests investing in individual stocks after conducting thorough research and understanding the risks involved.
Additional Considerations:
- Specific Circumstances: While Suze Orman generally advises against variable annuities, there may be specific circumstances where they could be suitable, such as for individuals seeking guaranteed income in retirement. However, it’s crucial to carefully evaluate the fees, tax implications, and investment options before making a decision.
- Professional Advice: Consulting a qualified financial advisor can help you assess your individual needs and determine the most appropriate investment options for your situation.
Suze Orman’s perspective on variable annuities highlights the importance of understanding the fees, tax implications, and investment options before investing. While variable annuities may offer some benefits, such as guaranteed income, they often come with significant drawbacks that can outweigh their advantages. Carefully consider your investment goals and risk tolerance before making a decision, and seek professional guidance if needed.
The Purpose for Fixed Index Annuities
In an attempt to compete with mutual funds, the insurance industry unveiled the Indexed Annuity, a brand-new annuity type, in 1994. The life insurance industry wanted a piece of the money that was flowing into index mutual funds, which is why they created this new product. These funds follow a number of market indices, including the S&P 500 index. ”.
– Suze Orman writing on annuities on SuzeOrman.com
In fact, bank CDs, fixed annuities, and other low interest-earning assets were the reason behind the creation of fixed indexed annuities in the 1990s. Given the low interest rate environment at the time, retirement savers were dissatisfied with the poor interest rates these products offered.
The 1994 bond market crash, following which the Federal Reserve raised interest rates to 1 5%, left many fixed-income investors off-balance. Bond fund returns were dismal, and fixed annuity’s previous era of high interest rates quickly came to an end.
Life insurance companies started to develop new products in response to the increasing demand for something better. The first fixed indexed annuity in the U. S. arrived in 1995 when the insurance provider Keyport Life unveiled the initial offering. Canada’s Genesis Financial was a partner in this new venture.
Keyport looked into the possibility of purchasing call options with a few cents for every dollar of fixed index annuity premium, which could potentially yield higher growth than fixed annuities. When other life insurance companies realized how successful the fixed indexed annuity was and how quickly its popularity was increasing, they quickly followed suit.
Even though interest rates have changed, fixed indexed annuities are still intended to fulfill their original function of providing the possibility of higher interest earnings. These rates are frequently higher than those of other types of fixed-interest securities. However, they were not intended to rival the returns produced by stocks and other equity-based assets, nor are they now.
Neither is a fixed indexed annuity intended to be nor is it a security (investment product). It’s an insurance policy that provides the advantage of being a retirement savings vehicle exempt from taxes. Additionally, the annuity can provide you with a lifetime income stream that is guaranteed, regardless of the state of the market.
Comparing Fixed Index Annuities and Mutual Funds
Why wouldn’t it be better to invest in a mutual fund that purchases the entire index and yields 100% of the return? For some people, certainly, but for others who would rather not take any risks at all, perhaps this indexed annuity would be a better option. ”.
– Suze Orman writing on annuities on SuzeOrman.com
In many ways, fixed index annuities are similar to mutual funds in that they can fail. For one, it’s not an apples-to-oranges comparison.
A fixed indexed annuity isn’t a security. Once more, it’s an insurance product whose value could increase above and beyond what other kinds of fixed-interest instruments could. As per Wink, a market intelligence firm specializing in annuities, a fixed index annuity is meant to yield 1% to 20%E2%80%93%202% above what a fixed annuity would yield over a specified period of time. Thus, if the guaranteed annual rate of a fixed annuity is 3. 5%, then the fixed index annuity may earn 4. 5% – 5. 5% also in a year. Once more, that’s just a rough estimate of the annuity’s growth potential; it’s not a guarantee.
Certain functions of fixed index annuities, when utilized appropriately, include principal protection, tax-deferred growth, and guaranteed lifetime income. Certain owners of annuities who are medically ineligible for life insurance use fixed index annuities as a means of increasing their estates and leaving a legacy for their heirs. Again because other insurance-based solutions have underwriting requirements, annuities can also be used to pay for long-term care costs.
It is important to avoid creating basic misunderstandings that could later cause disappointment when comparing the growth of fixed indexed annuities to market-based investments. Once more, it’s not intended to rival stock market returns and those of other comparable investment products.
For this reason, we advise you to use the following useful links to learn more about fixed index annuities:
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In this brief video, financial advisor, author, motivational speaker, and television host Suze Orman expresses her distaste for variable annuities.
Suze Orman Variable Annuities
What is a Suze annuity?
Suze: Indexed annuities. They are a type of annuity that is linked to a market index such as the Standard and Poor’s 500 index. So they offer you the potential to get higher returns than fixed annuities, for instance. Providing some protection against market risk. Why is that? Because they usually will guarantee you a minimum 00:35:40
Does Suze Orman hate annuities?
Suze: Can you write that down in your little Suze Notebook, Suze Orman does not hate all annuities. In fact, there was a time 00:05:53 Suze: in the United States, for years, actually that I was the number one advisor and salesperson, so to speak 00:06:04 Suze: In getting people to buy single premium deferred annuities.
Are Suze’s annuity opinions a nothingburger?
If you have ever heard Suze talk about annuities, you may wonder whether her annuity opinions are on the mark or are a nothingburger. Yes, opinions are subjective, but even the self-styled “Money Lady” gets it wrong on annuities, especially fixed index annuities. That does a disservice to retirees and those planning for retirement.
What is a variable annuity?
A variable annuity is also a contract with an insurance company for a specific period of time, but when you deposit money into a variable annuity, the money is used most often to purchase different mutual funds within the insurance contract. A variable annuity can have many funds for you to choose from, or just a few, depending on the company.