If you haven’t been pitched this investment before, chances are you will be soon.
Besides growing your own company, what is the best investment a small-business owner can make? This is a simple question that lacks a simple answer. For owners who have most or all of their net worth tied up in their business, it’s important to take some of that value and invest it in something that carries a different risk profile.
If you are in a stable, low-return business, then using some of that excess cash for investments that could provide a better return on your money is a good idea. However, if your small business is inherently risky, then it’s best to put excess money in stable and secure investments to offset the risk of your business. Many financial companies are aggressively promoting the purchase of variable annuities to both audiences, those with an appetite for risk and those looking for stability. It would seem then that variable annuities are the answer to everyone’s financial hopes and fears. They only seem that way; in reality small-business owners with capital to invest should proceed cautiously when it comes to variable annuities.
Variable Annuities Primer
A variable annuity is an investment product that is typically sold by insurance companies and offers features not found in other types of investments. The money you invest in a variable annuity is put to work in the stock market, bond market and other traditional investment markets, similar to how a single mutual fund purchase allows you to invest in many different types of assets.
When you invest directly in the stock or bond market, you always run the risk of losing everything if you make bad investment choices. This is where a variable annuity differs; it offers certain guarantees on your rate of return, like an insurance policy on your investment. So even if the money manager running the variable annuity loses money, you are still guaranteed a minimum return on your investment. In exchange for this guarantee, you pay a fee.
While in theory variable annuities offer the best of both worlds, it’s important to take a closer look at the key features.
The Guarantee
The guarantee portion of the annuity is typically expressed as a rate of return, such as 2 percent or 4 percent over the life of the annuity. This guarantee is not absolute. It is issued by an insurance company, which is subject to the realities of the current and future economic climate. It’s important to investigate the credit rating and overall credit quality of the insurance company underwriting the annuity. If there is any question at all as to their long-term financial soundness then you should proceed with extreme caution. Insurance companies with slightly dinged credit ratings tend to offer higher guarantees (and juicier commissions) but this is not in your interests. Also, some of the guarantees are not absolute and are instead subject to specific parameters and conditions which should be explained to you before the purchase.
