Variable Annuities

A variable annuity is a policy that you buy with an insurance company.  Under the terms of the contract, the insurer agrees to make periodic payments to you and these payments can either begin immediately or at some future date. You can purchase a variable annuity by making either a single, lump-sum purchase payment or by making installment payments over a specific period of time.

A variable annuity offers a wide range of investment options. This means that the value of your annuity may fluctuate depending on the performance of the investment options you select. Typically, the options for a variable annuity are mutual funds that invest in stocks, bonds, money market instruments, or a combination of the three.

Although variable annuities are typically invested in mutual funds, there are some significant differences between variable annuities and mutual funds.  Among these differences are the following:

  1. Variable annuities allow you to receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate). This feature offers protection against the possibility that, after you retire, you will outlive your money- a common fear among today’s retirees.
  2.  Variable annuities offer a death benefit. In the event of your passing, your beneficiary is guaranteed to receive a pre-determined sum – typically at least the amount of your total investment. Your beneficiary will receive this benefit even if, at the time of your death, your account value is less than the guaranteed amount.
  3.  Variable annuities are tax-deferred. This means that all increases in value and all interest accrued is not taxed until you withdraw the money.  The premise, as with many retirement savings instruments, is that you will be in a lower tax bracket upon retirement and will pay less in taxes at that time.  You also have the freedom to transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. This gives you the ability to make adjustments within your portfolio based on market conditions.  Working with an experienced financial planner will help you to maximize your return on a variable annuity.  When you do take your money out of a variable annuity, you will be taxed on the earnings at ordinary income tax rates rather than capital gains rates. Your investment advisor will help you to determine if this makes sense for you.


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