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Variable Annuity
Explore the world of variable annuity products.
The variable annuity is a tax-advantaged investment product available from insurance companies, whereby the insurer agrees to make periodic payments to you beginning either immediately or at a future date. While the variable is a form of deferred annuity, they differ from the guarantees of fixed and equity indexed annuities in that their value depends on the market performance of investments held by the variable annuity you purchase. As a result, you could experience higher gains over traditional fixed annuities, CDs and savings plans, but your investment and principal could also be at risk from unforeseen market changes.
The value of your variable annuity will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three. Although variable annuities are typically invested in mutual funds, the annuity differs from other investments in several important ways:
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The insurance company invests your money into a separate account, made up of a number of different investment subaccounts. You specify how much of your annuity will be invested in each portion, providing you control of where the value in your contract will be invested. Depending on the limits of the investment divisions, you can be as aggressive or as conservative as you would like. This gives the variable annuity the potential for higher returns, but it also requires you to assume a great risk of loss.
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Variable annuities have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount - usually the amount of your original investment. Your beneficiary only gets this benefit if at the time of your death your account value is less than the guaranteed amount.
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Variable annuities are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When you take your money out, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates.
While many investors consider the management fees behind the variable annuity to be high, the benefits of tax deferral normally outweigh the costs if the annuity is held as a long-term investment to meet retirement and other long-range goals. A typical mutual fund will hold dozens of different securities, giving some measure of diversification to ensure that a sharp decline in an individual security won't be nearly as damaging to your portfolio as it would be if you only owned a few securities.
The effective use of a variable annuity within your retirement plan really depends on a number of important considerations, including age, net worth, risk tolerance, investment preferences and growth expectations to name a few. While variable annuities can play an integral part as the risk-based portion of a diversified asset allocation strategy, they may not be ideal for an investor who insists that no part of their principal is ever at risk from loss.
For a friendly review of how variable annuity products work, and how they compare with your investment objectives, contact us today to arrange a helpful telephone interview with a qualified planner near to you.
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