A variable annuity's rate of return is determined much differently than that of a fixed annuity. The difference is similar to that of a mutual fund vs. a money market account. There is no guaranteed rate for a variable annuity, however there is also the opportunity for higher upside growth. Your funds are invested in equities composed of separate sub-accounts with various investment options. You have control over which investments are used, and how money should be allocated across each investment option.
Variable annuities do offer the potential of unlimited upside return as a positive, however the negative is they do not protect against downside losses. It is impossible to predict the rate of return, both positive and negative, because your funds are vested in market-linked equities and bonds. You could see a positive yield of 10% one year, while the next year has a 10% negative return. Variable annuities are less predictable than fixed annuities but can yield better returns. In the end, the trade off is the safety of a fixed annuity for the upside potential of a variable annuity.
With variable annuities, you have the option to place funds into sub-accounts that vest in different asset classes. Sub-account options vary from plan to plan, but can include:
As with all annuities, variable annuities provide tax-deferred growth. This means that any income or gains accumulated are not taxed until it's withdrawn. As a result, the money that would have been taxed is still working for you, increasing your overall yield. Other investment options, such as mutual funds or CDs, are taxed annually, meaning you lose future gains the taxed funds would have added to your overall account value.
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