Are you holding a variable annuity (VA) that you purchased some time ago from an enthusiastic insurance salesperson? It behooves you to periodically review it to see if its purpose, cost, and value are still aligned with your financial goals. Below are some steps you can take to better understand what you bought and whether or not it’s worth keeping.

As a reminder, a typical VA allows you to invest in a number of different stock & bond mutual funds while deferring taxes on the earnings, just like a 401(k). When you retire (or sooner if you prefer) you effectively trade the total balance in the account for the insurance company’s promise to pay you a certain amount each month for the rest of your life. You also have the option of changing your mind and cancelling the annuity contract or exchanging it for another.

The first question to ask yourself is why you purchased the VA in the first place. If your savings at the time were mostly in taxable accounts, and you didn’t have access to retirement accounts, the benefit of the VA as a tax shelter as described above might have been the reason. Or perhaps you did not expect to have many sources of guaranteed income except for social security during your retirement and decided to purchase the annuity as a source of greater future security. Consider whether these needs still apply to you based on your current financial situation and expectations for your future.

Next, consider the costs embedded in the VA:

• All annuities include a mortality and expense (M&E) fee, which can be as high as 1.35% of the total value of the account. Find out your cost from your salesperson or the insurance company’s support desk. While this fee also funds a life insurance death benefit, consider whether or not how much it is worth paying for that benefit.
• The mutual funds in which you invest also incur annual expenses, just like those in 401(k) and in brokerage accounts. Find out how those costs compare to the costs of similar mutual fund investments available to you through other types of accounts outside the VA.
• Annuities include a surrender charge to cover the salesperson’s commission in case you choose to terminate them. Your latest account statement should list both the current cash value and the surrender value. The difference represents the cost to you for moving or closing the account, and will also give an indication of the size of the commission you have been paying.

Lastly, try to determine as specifically as possible the value that the VA provides.

• The surrender value described above tells you what the account is worth (before taxes) if you choose to cancel the annuity and move the money elsewhere.
• The account’s cash value, your age, and current interest rates are among the primary factors in determining the future payout amount. You should be able to get a current illustration from the insurance company’s support desk. But remember that you will be giving up the money to the insurance company. Is the future expected income more valuable to you than the ability to keep the money and use it for investment, for bequests, or for other purposes?
• Some VAs offer riders that provide guaranteed minimum income or withdrawals for life. The statement may list a guaranteed benefit amount or guaranteed base value. Assuming it’s greater than the cash value, that difference indicates the value you will be getting from the rider in terms of a potentially higher income stream. Does the value justify the additional cost of the rider?

A variable annuity can be a useful adjunct to a well-diversified savings plan for supporting your future financial needs. But each one is unique, and costs and value not only vary widely across different products but are not especially transparent. If the analysis above does not help you reach a decision, you might consider asking your Certified Financial Planner or some other unbiased source for advice. Particularly if you have one with one of the more complex riders.

Thanks to Jeff Rancourt for some of the tips above.