A variable annuity refers to a type of annuity with a value that is related to the performance of each investment portfolio. Remember that payments from a variable annuity tends to increase when the portfolio is well. And, it can decrease when it loses money.
A variable annuity has the potential of providing higher returns, though they often don’t give a guaranteed payout. There are several things that you need to be aware of before you decide to get a variable annuity. This post explains everything you should know about variable annuity.
Understanding a variable annuity
A variable annuity is simply a contract that you can make with an annuity provider, which can be an insurance company. This means that you can make the purchase so that you can receive regular income for a set period or your entire life.
When you decide to buy a variable annuity, the cash you pay is allocated to investment portfolios. You should note that you can have multiple options for investing the money in your portfolio. These sub accounts or options can include bonds, stocks, stable income value mutual funds, money market funds, and other investments. And, the amount of money you can get may fall or rise depending on the portfolio’s performance.
Besides mutual funds and other investments, you can also invest part of your cash into a fixed account which can earn a fixed interest rate and is not linked to the stock market.
Quite often, the annuity company can guarantee return of premium, meaning that you may not lose the initial investment. However, if your portfolio fails to do well, you cannot gain any growth. But if the portfolio performs well, then you can have greater gains.
You should remember that just like any other investment, you need to consider the risks and benefits of variable annuities when it comes to investing. The annuity can be appealing because of its high returns. The good thing about a variable annuity is that there can be an inflation hedge. When your investment portfolio performs well, you can experience an increase in your payments. This helps to keep up with the inflation.
Also, you don’t pay any tax on earnings that you make until you remove the cash from the annuity. In most cases, the annuity company can guarantee that you may access the cash you invested even if you don’t make any interest when your portfolio performs poorly.
Lastly, you can receive payments for life. If you choose an option that allows you to receive payments for your entire life regardless of whether the portfolio performs badly and you don’t have the principal investment, then you will receive payments for life. But you may have to pay extra money for this option.
Choosing a variable annuity
A variable annuity is suitable for those who want to receive significant potential payouts and they accept to take on market risks. A variable annuity can help diversify your retirement investments and help to grow your money tax deferred. And, it can be a good option if you have already maxed out your yearly 410 (k) contributions.
It’s worth remembering that this type of annuity is often ideal for younger investors with higher risk tolerances and longer time to live. A variable annuity can also be appealing if you desire to have more control over your investment as you can choose the underlying bonds and stocks.
When it comes to a deferred variable annuity, you can usually find a payout phase and an accumulation phase. Take note that with a deferred annuity, you can start to get income payments at a later period. If you have a structured variable annuity as an immediate annuity, then there is no accumulation phase.
In the accumulation phase, the contract may increase in value. Therefore, you can make the first deposit or contribution to buy the annuity. You need to specify how you want to invest your money. Before you decide how to invest your funds, you must carefully check the prospectuses to see if there are other options.
Some variable annuities can also offer you a choice of investing your funds in fixed-interest accounts. The interest rate can change, but you usually have a guaranteed interest rate. And, over time, the money can either increase or decrease depending on the performance of the money you invested. In the accumulation phase, you can transfer the money between accounts without attracting any interest, though the annuity company can charge you for making the transfers.
In the payout phase, which is also called the distribution phase, you can receive your money and any profits either as a stream of payments or a lump-sum payment. You can state the length of time the payments can last. This can be a period of several years or even an indefinite period. Depending on your contract, you can also choose adjustable payments or fixed payments that can change, though this depends on the performance of the investment portfolio.
All variable annuities come with a death benefit. If your contract is not annuitized, the insurance company can make a death benefit payment to any of the beneficiaries appearing on the contract after your death. You should note that the death benefit beneficiary can receive the current value or premium of the contract minus any withdrawals and fees.
You can find standard death benefits at no cost more than the contract’s expense and mortality charge. This allows the beneficiary to get the current value of the annuity contract. Most insurance companies tend to create new death benefits with extra guarantees. These options may include guaranteeing a minimum regular increase in the death benefit or receiving the contract’s current value.
That said you should bear in mind that any enhanced annuity death benefit tends to be optional and carries slightly higher fees than standard death benefits. Sometimes, it can also have age restrictions. Aside from this, the beneficiary of the annuity can also be obliged to pay income taxes on the differences between the amount of money you paid for the annuity and what the annuity is worth when you die.