Independent Review of the Transamerica Advisor EliteSM II Variable Annuity
What’s covered in this Review?
In this review we’ll cover the following information on the Transamerica Advisor EliteSM II Variable Annuity:
- Product Type
- Current Rates
- Realistic long term investment expectations
- What to expect, and what not to expect
The Transamerica Advisor EliteSMII Variable Annuity is described as being available “exclusively through managed money platforms,” perhaps in an attempt to appeal to investors who are looking to capitalize on market gains. Variable annuities like this one seem to offer the best of both worlds – investment options and income payments – but there are many important details to be aware of in the fine print.
If your advisor or financial salesperson is trying to sell you on the idea of an annuity, or if you’ve already looked into them and think they might be a good idea, you owe it to yourself to check out how a particular annuity arrives at its benefits before you buy. The Advisor Elite II like all variable annuities will keep you invested in the market, which means if you are nearing retirement, you CAN lose money, even if you are paying extra for those income guarantees.
What’s even more confusing is that the fund performance on variable annuities are often misrepresented, which is why the SEC warns investors to “look past the fund’s performance” at the facts. Inside a single investment, the two goals of growing your money in the market and securing money for income are not very compatible, which is why variable annuities are known as one of the most expensive investments you can own.
Is the Advisor Elite II worth the cost? Well, that’s what we’re here to find out.
Annuity and Retirement Income Planning Information That You Can Trust
Annuity Gator is the place to go if you are looking for the most comprehensive and easy-to-understand reviews of annuities available on the Internet today. We are a team of experienced financial professionals dedicated to educating and informing hard-working individuals like yourself because we believe you deserve to know the facts. Studies have shown that an informed consumer makes better financial decisions, which can lead to greater peace of mind and a better retirement. And isn’t that what you deserve?
Other websites out there that advertise or talk about annuities make some pretty fantastic claims such as:
- High Payouts
- Low Fees
- Top Rated Companies
- Guaranteed Income For Life
- Professional money management
- Earn 7-8% Returns With NO Market Risk
In our opinion, these claims are misleading at best. Annuities, in general, are complicated investments with riders and enhancements and sub accounts that can get really confusing and sometimes even really expensive, especially if you don’t know what to look for or what questions to ask.
The number one fear of retirees today is running out of money, which has many people looking only at the highest rate of return when shopping for investments. Financial salespeople might make it sound as if their annuity can easily earn returns of 7 to 8% or even higher with no risk to your principal.
What they are really talking about, however, are the guarantees on the optional benefits side of the annuity. You pay extra for these guarantees, furthermore, these guarantees are not on the rate of return earned by the investments inside the annuity. For variable annuities, this is especially confusing because you are paying fees for access to these proprietary investments.
This does not mean that annuities are bad; it just means that you want to understand what kind of annuity you are getting before you commit. Here at Annuity Gator, we can help you find the best annuity for your needs by doing the investigative work for you. We then report our findings in plain English so you can decide for yourself whether or not an annuity is the right investment to help you achieve your financial goals.
Ready to learn more? Let’s jump in:
Transamerica Advisor EliteSM II Variable Annuity at a Glance:
|Product Name||Advisor EliteSM II Variable Annuity
|Issuer||Transamerica Life Insurance Company
|Standard & Poor’s Rating||AA‐ is 4th highest of 21 ratings (as of May 12, 2016)
Opening Thoughts on the Transamerica Advisor EliteSM II Variable Annuity
The very name, Advisor Elite II, seems to inspire investor confidence on the money management side of the annuity. As an insurance company, Transamerica strives to live up to its mission of inclusiveness (“financial security should be available to all”) by offering a wide variety of customizable annuities. So why would you want to own mutual funds inside of an annuity?
Transamerica describes the two phases of the variable annuity investment as the accumulation phase and the income phase. The accumulation phase is when you grow the money, and the income phase is when you receive the periodic payments.
With mutual funds, it’s normal to expect to pay a management fee for market access. With variable annuities, you select from a variety of mutual fund-like investments called sub accounts. You will be charged a fee for the management of each subaccount (known as portfolio operating expenses) as well as a fund facilitation fee for certain sub accounts. You will also pay the insurance company a set of fees known as a Mortality and Expense Risk fee (or M&E) plus an administration charge, and if you want to guarantee your income or enhance your death benefits, there are even more fees.
Do you get to select from more investment choices for all these additional fees? Nope. In fact, your selection is limited as compared to what you would be able to get outside of an annuity, and if you want income guarantees, then even more restrictions will be put on your investment choices.
Are there tax advantages to the variable annuity? Yes, there could be, but depending on what financial phase you are in, you might already be getting these tax benefits for free, so why would you want to pay for them?
What makes investing in sub-accounts different than traditional mutual funds is that you can move from one fund to another without having to pay taxes on the gains until you actually withdraw the money. The Advisor Elite II gives you 12 free transfers between sub-accounts during the accumulation phase each year and it has no surrender charges, which is unusual for an annuity.
However, on the downside, when you take your money out, you will be taxed on any earnings at ordinary income tax rates as opposed to the lower capital gains tax rates associated with mutual funds. You might also be charged a 10% Federal tax penalty if you under the age of 59½.
What’s most troubling, however, is that if you if you are moving money out of an IRA or 401(k) to purchase this annuity, then you already have a tax-deferred accumulation vehicle. This means you would be paying more fees than you have to for a benefit that you already had in the first place. If you have already maxed out your IRA and 401(k) options, then this might make sense, but otherwise, you have to ask yourself if this is the right investment vehicle.
TransAmerica is an established and highly-rated company. This is a good thing if you are looking for income because guarantees are only as strong as the claims-paying ability of the insurance company who holds your investment. However, you should be aware that the risk you are exposed to on the investment side of things actually works against the goal of income guarantees.
If income is your goal, we recommend that you ask your advisor or financial salesperson how much income you will actually be getting, because the Advisor Elite annuitizes your money once the income payments begin. To annuitize means to trade a sum of money for an income stream. There is no partial annuitization, so once these payments begin, your money is basically locked in a safe that you don’t have access to.
But just because you can’t access the money in that account doesn’t mean your policy can’t lose money.
Sorry for the bad news, but perhaps the biggest thing to be aware of with this annuity is that despite all the fees and income guarantees, you CAN still lose money. If this comes as a surprise, then you’d better keep reading. We will also be diving deeper into the investment side of things because, in exchange for the risk and management fees, you might also expect higher market gains and superior fund performance. Is this the case?
Excellent question, and one we will speak directly to, right after this brief message brought to you by our legal department . . .
This is an independent product review, not a recommendation to buy or sell an annuity. Transamerica has not endorsed this review in any way nor do we receive any compensation for this review. This review is meant to be an independent review at the request of readers so they could see our perspective when breaking down the positives and negatives of this particular model annuity. Before purchasing any investment product, be sure to do your own due diligence and consult a properly licensed professional should you have specific questions as they relate to your individual circumstances. All names, marks, and materials used for this review are the property of their respective owners.
How Transamerica Describes the Advisor EliteSM II Variable Annuity
Transamerica advertises the benefits and features of this annuity on their website as follows:
- No surrender charge schedule with access to exclusively managed money platforms from some of the most recognized money managers in the industry.
- Tax-deferred growth, automatic asset rebalancing, dollar cost averaging, and 12 free transfers between sub accounts each year.
- Death benefit options that can increase your legacy by offering protection during down markets.
- Guaranteed lifetime payments through a variety of payment schedules and options, should the policy be annuitized.
There are also a few other bells and whistles, but that covers the basics. If you want to access the company’s marketing material, you can click HERE.
How Financial Advisors Might Present This Annuity to You
The Transamerica Advisor EliteSM II offers a selection from over 60 sub accounts described as exclusive to managed money platforms, so you’ll likely hear talk about the asset rebalancing and dollar cost averaging with the option to guarantee lifetime payments later on. You might also hear about superior returns based on adjusted historical performance data. All of this with the added benefit of no surrender charges.
Here’s the catch: financial salespersons are permitted (according to the rules of the prospectus) to use a few tricks when talking about the rates of return and fund performance.
First of all, he or she (or sales literature or advertisements) can quote average annual returns based on data for time periods BEFORE a particular fund even existed.
That’s right – they can make it appear as if the fund you are selecting has a history of high returns. The prospectus also warns that not all the data presented reflects all of the fees and charges that can be deducted, so your figures “would be lower if these charges were included.”
While it might be obvious to you that fees lower your fund returns, most people aren’t aware of how they can harm the compounding muscle of their investment. If growth is your main goal, then you would do well to avoid as many fees as possible.
Beware, however, that not all investors are told about all the fees they will be charged. We’ve even seen people who had optional benefits they didn’t even know they were paying for. This happens because when financial salespeople present this variable annuity, they are also permitted (again, according to the prospectus) to use the premium enhancements when talking about the total return figures. What does this mean?
If you want to structure income payments or get a guarantee with this investment, then you add an optional benefit known as a rider. The Advisor Elite offers you three choices:
1. Retirement Income Choice 1.6
2. Retirement Income Max
3. Guaranteed Principal Solution
All of these options will cost you an additional fee, and they will limit your withdrawal amounts once you enter into the income phase.
In return, you get growth enhancements that guarantee a rate of return (usually during the accumulation phase) as high as 5.5%. According to the prospectus for this annuity, this percentage can be presented to consumers as part of the total return figures. Why is this so misleading?
This enhancement is a percentage used to guarantee the payment of your optional benefits. It does NOT represent the actual policy value nor does it guarantee the performance of the underlying investment funds. The enhanced growth rate builds up in a separate account. We sometimes call this account “funny money” because it’s not real money you can take out whenever you want.
For example, although the Advisor Elite advertises “no surrender charges,” if you wanted to reach into the account growing at this enhanced rate to withdraw a lump sum, say, to pay for your daughter’s wedding, you wouldn’t be able to. The actual value of your account and the money you can access
without surrender fees is what Transamerica calls the “withdrawal base”.
It makes sense to assume that if you have a withdrawal base growing in the market earning returns in addition to that 5.5% enhancement, then you will then get a higher income payout amount. This is sometimes what investors are led to believe when financial salespeople pitch these kinds of annuities, but the reality is much different. Your actual account value or withdrawal base does NOT grow at a guaranteed rate, it CAN lose money, and it is the account you would access to pay for the wedding without surrender charges.
Today there are literally hundreds of annuities to choose from that can offer you structured income and principal guarantees. When an annuity is not exposed to direct market fluctuations (like this one is), then it can do a better job of guaranteeing you more income for lower fees. (Want to compare? Go HERE.) If you still find this confusing, take a look at this 2016 Consumer Report about variable annuities. It explains pretty well how these products work and why they aren’t the good deal they might have once been.
What About the Fees?
The all-in-one idea of an investment that can give you market growth AND income is what makes the variable annuity one of the most expensive kinds of annuities that you can own. Even if you don’t elect one of the income benefit riders, you will still be charged the mortality and risk fee from the insurance company every year, and this is in addition to the subaccount fees.
These fees can be hard to locate because, according to the regulations, insurance companies are only required to tell you about the M & E, general administration charges, and optional benefits fee. They will also report on any annual service charges or surrender fees. If you want to know the sub-account fees you’re paying, you may be directed to read your prospectus where you will have to search through thousands of words. Fun fun fun.
Don’t worry, though, we’ve done the searching for you. Here is a breakdown of all the fees you can expect to pay when you purchase this investment:
- Mortality and Expense Risk Fee: .30%
- Administration Charges: 0.15%
- Annual Service Charge: 0 to $50
- Optional Death Benefit Rider: .15% to 1.65%
- Optional Income Benefit Rider: 1.25% to 2.30%
- Fund Facilitation Fees: .20% to .30%
- Portfolio Operating Expenses: .16% to 2.86%
Fee Total: 2.21% to 7.56%.
Transamerica charges the “fund facilitation fee” in order to make certain sub accounts available as investment options under the policies. They apply only to certain sub accounts that, according to the prospectus, “invest in underlying funds that do not provide us with the amount of revenue we require in order for us to meet our expenses and target returns.”
Translation: these funds might not earn the insurance company high enough returns to stay in business, and so they charge you a fee if you want to invest in them.
If you were thinking about purchasing this annuity, perhaps you might want to take a look at your other options. You can get started by clicking HERE.
The Annuity Gators End-Take on the Transamerica Advisor EliteSM II Variable Annuity.
Where it works best:
- A place to grow money tax-deferred for someone already taking advantage of the maximum IRA and 401(k) amounts.
- An accumulation vehicle for someone who needs access to their money without surrender charges.
- An accumulation vehicle for someone who likes to change their mind a lot and transfer between multiple sub-accounts.
- As a source of income revenue with benefits delivered by a reliable company.
Where it works WORST:
- For investors who are entering or already in the income phase of their financial life (meaning retirement).
- For the investor who does NOT want to pay a lot of fees.
- For investors who do NOT want to take on risk during retirement and have a low-risk tolerance.
- For investors who do NOT want to be in the stock market.
The Advisor EliteSM II Variable Annuity offers no surrender charges with limited access to stock market funds and guaranteed benefit options all wrapped up inside an expensive insurance wrapper.
In terms of growth, financial salespeople are allowed to use a few tricks when presenting the rate of return on the growth of the investment funds. Be aware that what you hear in terms of returns might actually be part of the 5.5% enhancement you get when you pay for an optional benefit rider.
As an income producing investment, this annuity offers a flexible menu of three different income options, however, due to its exposure to market risk, the investments are restricted and do not necessarily give higher income payouts than other annuities that are not exposed to market risk.
So what does all this mean to you? Although the name Advisor Elite inspires confidence, the fund performance of the subaccounts themselves might not deliver what you would expect from such an expensive investment. If you are looking for an investment that keeps up with inflation while providing income, you might be able to do much better if you just spend a little time shopping around.
Thanks for bearing with us on this rather long post. If you found it helpful, please spread the word and share it with others. To learn more eye-popping facts about variable annuities, get your free copy of the 2016 Consumer Report: The Truth about Variable Annuities.
Lastly, like all humans – we do make mistakes. If you see one on this review please reach out and let us know since this annuity’s terms may have changed since we published this review. We are always more than happy to make corrections and give credit where it is due. If you’re an investor and this review causes confusion and creates questions, feel free to reach out as well. We can’t always get back right away, but we can usually clear up any questions within a day or two.
Have an Annuity You’d Like to See Reviewed?
No problem, our team of highly trained annuity geeks can jump to it! Click here to get started and we’ll do our best to get it online as soon as possible.