In this article we provide a general overview of variable annuities, and some of the things to consider when choosing the right annuity for you.
As with any annuity insurance, a variable annuity is a contractual agreement between an investor and an insurance company. The investor provides an upfront payment - either one time, or installments. In return, that investor has the opportunity to receive on-going payments of the principal paid plus the interest earned, for a set time, or for life.
With a variable annuity, you decide how to invest the money that you have placed with the insurance company. There will be a list of preselected funds ranging from highly aggressive stocks to conservative bonds and you choose how you wish to invest. A variable annuity provides you with similar flexibility of having your money outside of the annuity, but with the tax deferral advantages of an annuity
A variable annuity usually comes with a fixed annuity option. During accumulation, you can decide to invest your payments in stocks and bonds of your choice and the money you allocate thus will rise or depreciate over time depending on the performance of the funds. If the market becomes too risky for your blood, you can lock in a fixed interest rate, protecting yourself from further market fluctuations. You can also allocate a section of your payout to any fixed account that will render you a fixed interest rate. So even if you keep shifting your investment you need not be paying any tax on the income gains until you receive payment. In the payment phase, you could be getting your payments and gains as a lump sum or if you wish so, you could stagger it as a range of regular payments.
Historically, major US stock markets have provided investors with great returns. As we've seen, they can greatly drop, however, over the long-term, most economists and experts believe the stock market to be a good investment. A variable annuity allows you to receive the tax deferral benefits, while allowing you to flexibly invest in the stock market. One does need to be aware however, that there can be expenses of up to 3% or more for a variable annuity. Make sure you fully analyze the relevant costs and potential payouts before choosing your annuity.