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Variable Annuity Overview

The Common Features of Variable Annuities

Variable annuities are investment vehicles that are structured much like a 401(k). The owner of a variable annuity is able to choose from several investment options with in one product. Investment options will typically range from money market accounts on the conservative side, to foreign equities on the aggressive side.

 

Unlike a fixed annuities, there is a potential for losses as well as a potential for higher gains. The payouts with vary depending on specific investment options selected in the account. You may choose to fund the annuity with a lump sum up front payment or contributions over time.

 

Variable annuities are used for many different objectives. One common objective is deferral of the recognition of taxable gains. Money deposited in a variable annuity grows on a tax-deferred basis, so that taxes on investment gains are not due until a withdrawal is made.

 

Variable annuities offer a variety of funds ("subaccounts") from various money managers. This gives investors the ability to move between subaccounts without incurring additional fees or sales charges.

Annuities
Typical Variable Annuity Features - (vary with each individual product)

All annuities have three primary advantages: Tax Deferral, Avoidance of Probate, and a Guaranteed Income (optional) for a fixed period of time, or income for life. More specific reasons to invest in variable annuities:

  • Aggressive Investment Options
  • Better suited for investors with a longer investment period. If retirement is a ways off, higher risk for higher reward may be more suitable.
  • Adjustable Sub-Accounts
  • Change the make-up of your investment portfolio without tax implications. Switch from a money market to equities with no penalties.
  • Guaranteed Rate
  • The reason why fixed annuities are so popular, is because they carry a fixed interest rate for the number of years the contract states. This translates into a guaranteed receipt for people who need regular income.
  • Very Low Risk
  • Money can only be lost if the insurance company becomes insolvent and your investment exceeds Annuity State Guaranty Limits.
  • Retirement Income
  • Fixed annuities yield a monthly fixed income, which is invaluable for retirees. Secure monthly checks can keep your household expenses sorted, even after you retire.
  • 3%-10% Return
  • Solid returns for essentially no-risk investment. Better than CDs, especially at longer terms.
  • Lifetime Income
  • An optional lifetime provision guarantees paychecks for life. No worries about outliving your retirement savings.
  • Life Insurance
  • Fixed annuities are like life insurance policies, for they come with the provision of death benefit for the remaining family members.
  • Unlimited Contributions
  • There is no limit on the amount you wish to invest in a fixed annuity, nor is there a restriction on how many policies you should or can own. Choose your amounts and leave behind a healthy inheritance for your family.
  • Inheritance
  • Bequeath money to loved ones probate-free. Avoid estate/death taxes.
  • Inflation Hedge
  • Fixed annuities are good inflation hedges as the amount you receive has some amount of interest included in it.
  • Tax-Free Gifts
  • Gift up to $10,000 per individual, per year, tax-free. Gift money to an unlimited number of individuals.

     

    For more discussion on each feature, read the Fixed Annuity Features section.
    Fixed Annuity Performance

Fixed annuities give a solid, guaranteed growth, as long as they are not prematurely terminated. Premature termination leaves you worse off, as compared to when it is allowed to reach maturity. Deferred fixed annuities earn substantially more than other money market instruments, like mutual funds and CDs, because of a compounded and totaled tax deferral.

 

Visit the Fixed Annuity Performance page to compare a typical fixed annuity, CD, and money market account.

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