Guarantees In Variable Annuities?

I have two variable annuities with the highest possible ratings. They are down a bit in this market, but they have guarantees where you can lock in 5-7% guaranteed income for life, even if you lose all your money in the annuity. A new one coming out will have a cost of living adjustment built in.

Is there a down side to this I don't know about? It seems if they let you take out income no matter what, that will you get all your money back eventually, even if your initial investment in that annuity is worth hardly anything. Thanks!

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That depends on what you do and don't know!

Here's how it works (briefly): You actually have two accounts. Think of one as a regular investment account and the other as a defined benefit pension.

The investment account invests in the market similar to a mutual fund or ETF would. There are fees associated with both the annuity and the investments. 2.5%-3.0% is not uncommon. However, the average mutual fund is about 1.5% and there are some very good ETFs and index mutuals that charge less than 1/10th of the amount charged by the annuity. That is probably one of the biggest drawbacks. The investment account is liquid in that you can call the insurance company at any time and request that they send you some or all of your investment. Any surrender fees are deducted from this amount, but usually after

4-7 years there are no fees and furthermore they decline to zero over that 4-7 year period. Also a potential drawback, but usually an over- inflated one. Most importantly, this account fluctuates with the market and can possibly drop to zero.

The pension account is where the annuity really shines (IMO). This account also rises and falls with the investements in the first account. However, in a down year your investment account (and any similar outside investement) will fall, while this account appreciates by 5%-7%. You can also lock-in the higher of the two values on any given policy anniversary and use that as your pension base going forward. This account is often compared to a pension due to the fact that it does guarantee an income stream for life, but you cannot call the insurance company and request a lump sum. You essentially have no account balance, only a guaranteed stream of payments.

Long story short, your annuity exchanges liquidity for guaranteed income. Over the long run, your investment account balance is likely to be lower than had you invested in a similar mutual fund (due to the fees). However, many people nearing retirement cannot afford to wait on the "long run". Whether or not the annuities were a good purchase will depend upon your needs and the specifics of each annuity.

One last thing, why multiple annuities?