Ask questions before you invest

• By Milt x_Zall
• Jul 26, 2002

This week, I will wrap up my month-long discussion about variable annuities, which have become a part of the retirement plans of many Americans.

Questions to Ask Before Investing

Financial professionals who sell variable annuities have a duty to advise you as to whether the product they are trying to sell is suitable to your particular investment needs. Don't be afraid to ask them questions. And write down their answers, so there won't be any confusion later as to what was said.

Variable annuity contracts typically have a "free look" period of 10 or more days, during which you can terminate the contract without paying any surrender charges and get back your purchase payments, which may be adjusted to reflect charges and the performance of your investment. You can continue to ask questions in this period to make sure you understand your variable annuity before the "free look" period ends.

Before you decide to buy a variable annuity, consider the following questions:

* Will you use the variable annuity primarily to save for retirement or a similar long-term goal?

* Are you investing in the variable annuity through a retirement plan or IRA (which would mean that you are not receiving any additional tax-deferral benefit from the variable annuity)?

* Are you willing to take the risk that your account value may decrease if the underlying mutual fund investment options perform badly?

* Do you understand the features of the variable annuity?

* Do you understand all of the fees and expenses that the variable annuity charges?

* Do you intend to remain in the variable annuity long enough to avoid paying any surrender charges if you have to withdraw money?

* If a variable annuity offers a bonus credit, will the bonus outweigh any higher fees and charges that the product may charge?

* Are there features of the variable annuity, such as long-term care insurance, that you could purchase separately for less money?

* Have you consulted with a tax adviser and considered all the tax consequences of purchasing an annuity, including the effect of annuity payments on your tax status in retirement?

* If you are exchanging one annuity for another one, do the benefits of the exchange outweigh the costs, such as any surrender charges you will have to pay if you withdraw your money before the end of the surrender charge period for the new annuity?

Remember: Before purchasing a variable annuity, you owe it to yourself to learn as much as possible about how they work, the benefits they provide and the charges you will pay.

For More Information:

Securities and Exchange Commission Online Publications for Investors

"Invest Wisely: An Introduction to Mutual Funds" - Much of this information applies to variable annuities, as well.

"Mutual Fund Investing: Look at More Than a Fund's Past Performance"

Mutual Fund Cost Calculator - Allows you to compare the total costs of owning different mutual funds.

"Ask Questions" - Questions you should ask about all of your investments, the people who sell them and what to do if you run into problems.

"Check Out Brokers and Advisers" - Describes how to get background information about your broker or investment adviser, including prior employment history and disciplinary actions.

NASD Regulation Inc. The independent subsidiary of the National Association of Securities Dealers Inc. is charged with regulating the securities industry and the Nasdaq Stock Market, including sellers of variable annuities.

National Association of Insurance Commissioners. The NAIC is the national organization of state insurance commissioners, and variable annuities are regulated by state insurance commissions, as well as by the SEC.

Zall, Bureaucratus columnist and a retired federal employee, is a freelance writer based in Silver Spring, Md. He specializes in taxes, investing, business and government workplace issues. He is a certified internal auditor and a registered investment adviser. He can be reached at [email protected]