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Variable Annuities

 

A variable annuity differs from a fixed annuity in that you can choose to invest your payments in a range of investment products, such as mutual funds. The amount you earn is based on the performance of the investment products. Investing in a variable annuity is similar to investing in a mutual fund, but with added security benefits such as a guaranteed living and death benefits, even if the underlying investments perform poorly. This makes variable annuities very attractive for people who are uncomfortable investing in the stock market without any guarantees.

In addition to the above benefits, one of the primary advantages of a variable annuity is that it provides a vehicle for tax-deferred investment growth without the maximum annual contribution limit of an IRA or 401(k) plan. You don't pay tax on your investment earnings until you withdraw the money.

Accumulation and Payout

There are two phases or periods in the lifecycle of a variable annuity. The first phase is known as the accumulation phase. During this phase you make account contributions to the insurance company and those contributions are invested, typically in a mutual fund.

During the accumulation phase you may reallocate your money from one investment to another without paying tax on your income and gains.

The second phase is known as the payout phase. This is when you can begin making withdrawals from your variable annuity without incurring surrender charges. You can choose to receive your payout as a single lump sum, or spread it over a period of time via regular payments (normally monthly).

If you choose periodic payments, you have additional choices in relation to the payment period and the payment amount. The payment period can be a fixed period of time, or an undefined period, such as your lifetime, or the lifetime of you and your spouse. The payment amount can be fixed or varying based on the performance of your investments. The amount you receive in each period payment will depend on the payment options you select.

By choosing periodic payments for an undefined period, you can provide yourself with protection against the possibility that you will outlive your assets (consume your assets before you die).

Variable annuities have a death benefit, payable to a beneficiary of your choice. In the unfortunate event a tragedy strikes before the payout phase commences, your beneficiary is guaranteed a certain monetary value.

Drawbacks to Variable Annuities

Similar to other types of annuities, there are some drawbacks to investing in variable annuities:

  • Unlike a direct investment in a mutual fund, your investment is not very liquid; therefore it is not easy to get your funds out quickly if you want to withdraw them early. However, the primary purpose of an annuity is to save for retirement, therefore this is not a significant drawback for most people.
  • You must pay a penalty if you elect to withdraw funds from a variable annuity before you reach age 59 1/2.
  • When you withdraw money from a variable annuity, your earnings and gains will be taxed at ordinary income tax rates. Capital gains are not taxed at capital gains tax rates which may be lower than ordinary income tax rates. The benefits of tax deferral will generally outweigh the costs of a variable annuity only if you hold it as a long-term investment.

Variable Annuity Fees and Charges

When you invest in variable annuities, there are several different types of fees you may have to pay. These should be considered carefully before investing in a variable annuity. The charges and fees include:

  • Mortality and Expense Risk Charge

    The additional benefits provided by a variable annuity do not come without cost – the insurance company must charge a fee to cover the cost of guaranteeing these benefits. This charge compensates the insurance company for the risk it assumes for providing the variable annuity and its associated guarantees. This charge is typically a small percentage of your account value.

  • Administrative Fees

    These fees cover the cost of administering your variable annuity and can be either a fixed amount or a small percentage of your account value.

  • Underlying Fund Expenses

    These are indirect fees arising from the variable annuity being invested in mutual funds. They are administrative and management fees paid to the fund manager, not the insurance company. These fees would also be incurred if you invested in the mutual fund directly, therefore do not represent an additional cost of investing in a variable annuity.

  • Surrender Charges

    These charges only apply if you withdraw money from your variable annuity before the scheduled payout phase. Surrender charges are normally expressed as a percentage of your account value and tend to decrease each year during the accumulation period. No surrender charges apply during the payout phase.

All investment opportunities involve some level of risk and variable annuities are no exception. However, with the right approach and a long-term investment horizon, variable annuities can be an excellent investment option.

Variable Annuity Quotes

Requesting variable annuity quotes is easy. Simply complete the easy request form, starting with your zip code below. There is a range of investment options in each state, each suited to differing investment timeframes and goals. Should you require any further information you will have the opportunity to discuss the various options with a qualified insurance agent in your state when you request your variable annuity quotes.

Please note that all annuity quotes are free and you are under no obligation to purchase an annuity as a result of requesting a quote. Our goal is to assist you in making informed investment decisions based on your personal needs and circumstances.

 

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