Ask the Right Questions About Annuities

Physician's Money Digest, December31 2004, Volume 11, Issue 24

If you have decided that an annuityfits your overall investment strategy,the next step is to choose between afixed and variable annuity. But how doyou know which one is right for you?The following questions will help youdetermine your ideal annuity:

• Would you like to choose yourinvestment options? With a fixed annuity,the insurance company makes allthe investment decisions. You essentiallytrade decision making for a fixedpromise that you will be paid. On theother hand, with a variable annuity, youget to choose from a menu of investmentoptions, which usually include thesponsoring company's funds, and essentiallyexchange a guaranteed result forthe right to exercise investment direction.With a variable annuity, you dobear a greater amount of risk. Consequently,the cash value of a variableannuity contract is not guaranteed.

•How much risk are you willing toaccept? Fixed annuities are consideredlow-risk investments. Therefore, if youchoose a fixed annuity, you may sacrificepotential growth for safety and certainty.Variable annuities are considered ahigher investment risk. They offerinvestors less safety and certainty, butthe possibility for greater growth.

•Have you compared variable annuitieswith mutual funds? If you're leaningtoward a variable annuity but can'tdecide between that option and a mutualfund, it's important that you knowhow the two vehicles differ. First, a variableannuity grows on a tax-deferredbasis. In contrast, periodic distributionsfrom a regular mutual fund are subjectto annual taxation, even if they are reinvestedin additional shares. The annualtaxation of mutual fund earnings meansyou might be required to pay additionaldollars or liquidate some shares to meetthe tax liability. In addition, a variableannuity offers a lifetime payout option,while a mutual fund account doesn't.Finally, variable annuities also provideowners with a guaranteed minimumdeath benefit, while mutual funds don't.

While these three factors mightappear to favor annuities, mutual fundsdo have their own advantages. Certaintypes of mutual fund accounts avoidearly withdrawal penalties. On theother hand, there may be some earlysurrender charges associated with annuityaccounts. Also, overall fees may belower with mutual funds. Lastly, a variableannuity may offer only a limitednumber of investment options to physician-investors.

Evaluating the risks and knowingyour own risk tolerance are importantwhen it comes to deciding which investmentsare right for you. Of course, fixedannuities, variable annuities, and regularmutual funds are not mutually exclusive;there is room for all three in a well diversifiedportfolio. Together, they mayprovide you with a good combinationof relative safety, growth potential,liquidity, and payout options. Keep inmind, however, that the principal valueand rate of return for variable annuitiesand mutual funds fluctuate accordingto market conditions. A prospectus,which contains information aboutcharges and expenses, should always beread before investing.

is a

wealth advisor and owner of

Connington Wealth Management

Group in Pine Brook, NJ. He specializes

in working with health

care professionals who are committed

to long-term investing, improving their

quality of life, and working toward a more secure

future. He welcomes questions or comments at

973-808-8181 or

Securities offered through Linsco/Private Ledger,

member NASD/SIPC.

William J. Connington III