A variable annuity is different from other several types of annuities. It is a fund investment contract between you and an annuity provider. Whereas, in this agreement an insurance company allows you to purchase a variable annuity plan. You purchase a stream of income for your life, if not for a set time period. Therefore, variable annuities completely differ from fixed annuities. You are allocated an investment portfolio. Also, the money you pay will rise or fall depending on the performance of the portfolio.
How do variable annuities work?
When you make contributions to variable annuities, you have several options. Such as you can invest your funds in stock mutual funds, bond mutual funds, money market funds, stable income value mutual funds and much more. Also, you are allowed to invest among them by paying a transfer fee. A deferred variable annuity generally has two phases: the accumulation phase and the payout phase. In the accumulation phase your money can increase in value. So you need to carefully examine the prospects and go with the best offer.
In some variable annuities you have the choice to invest in a fixed-interest account. The interest rate could change from time to time, but you will have a guaranteed minimum interest. For example, you can invest your money by distributing it among several sources of income. Such as 50 percent in Bond Income, 30 percent in Domestic Stock, 10 percent in Fixed-interest and 10 percent in International Stock Fund. You have a secure financial future and get guaranteed income for retirement by purchasing variable annuities.
Let us take a look at the payout phase, which is also known as the distribution phase. You will receive your funds in a lump sum amount or as a stream of variable payments. You are allowed to allot the length of time your payments will last. For example, it may be for a year or as long as you live, including your spouse or the beneficiary you name in the variable annuities contract.
The Pros and Cons
The benefits and risks must be considered when you invest in variable annuities. They carry the assurance of higher returns on your investment than fixed annuities. But according to the Financial Industry Regulation Authority in the U.S, they have their pros and cons. The risks that come with them warrant caution before you invest your money.
| Pros | Cons |
| Possible inflation risk | No guaranteed return |
| Tax deferral | Taxed as income |
| Initial investment protection | Complexity |
| Death benefit | Surrender charges |
| Lifelong payment | Mortality risk charges |
| Administrative fees | |
| Sales commission | |
| Underlying fund expenses. |
Variable annuities come with a “free look” period. Especially it is the time given to you to decide on the annuity which is right for you. Also, you are given 10 days or more to make a decision to sign the contract or cancel it and there are no surrender charges involved in it. Once you terminate it, your invested premium amount will be duly returned to you without any interest. It is only that the amount will be kept idle without any growth in its value.
