Variable Annuities On A Need-To-Know Basis

Variable annuities are a kind of fusion of insurance and mutual funds, so before you really meet variable annuities, it’s probably good to know what annuities and mutual funds are.  Many people don't realize that though it's an investment, if you wanted to get a variable annuity, you would need to contact your life insurance agent.  If you don't currently have a life insurance policy, get a few free life insurance quotes from qualified agents, and select the agent that best understands what you desire in a policy.

Annuities are agreements between you and your insurance company. You make one large payment or a series of payments to your insurance company, and they agree to make payments back to you beginning at a certain future date. Imagine you lose your job or are laid off—maybe because of the economic crisis, or retirement; if you’ve got an annuity from your insurance company, they’ll cut you a sort of paycheck, based on the terms of your annuity.

A mutual fund is “a company that brings together money from many people and invests it in stocks, bonds or other assets,” according to the US Securities and Exchange Commission.

Variable annuities are mutual fund investments with some of insurance’s qualities. The value of variable annuities depends on what investment options you choose. As with any investment opportunity, variable annuities involve risk. Keep in mind, though, that variable annuities are a long-term investment, and the pay-off is greater the longer the variable annuities are left alone.

Variable annuities in two phases

Variable annuities phase one: The Accumulation Phase

In this variable annuities phase, you make payments to your insurance company that are then invested, typically in a mutual fund.

How do you figure out where to invest your variable annuities? The document called the prospectus describes the major features of your investment options. Ask your insurance agent for the prospectuses that apply, read them carefully and weigh all your options before making a decision.

During the variable annuities accumulation phase, you can move your money from one investment to another without being taxed. But if you withdraw money during the early stages of the accumulation phase, you may have to pay a fee and some tax.

Variable annuities phase two: The Payout Phase

At the beginning of this variable annuities phase, you can choose to receive your payout as one big sum, or over a period of time (typically monthly). With periodic payments, you can choose either a set or undefined payment period, fixed or varying (based on your investments) payments. The amount of each payment will depend on the time period of your payout phase.

Variable annuities: Three Benefits

1. Variable annuities allow you the benefit of periodic payments. These payments can last for the rest of your life or that of your beneficiary. Periodic payments are a kind of protection against the possibility of outliving your assets.
2. Variable annuities have a death benefit. This means that if tragedy should strike before the insurance company has begun paying out on your variable annuities, your beneficiary is guaranteed a certain monetary value.
3. Variable annuities are tax-deferred. Until you withdraw the money, you don’t pay taxes on any income or investment gain from variable annuities. You also don’t pay tax if you transfer your money from one investment to another.

The Cost Of Variable Annuities

When you invest in variable annuities, there are a few fees you’ll have to pay. These should be carefully considered before you decide on your variable annuities. Some fees other than those listed below may apply, so be sure to ask the provider of your variable annuities about their specific fees.

1. Surrender charges: These charges apply to your variable annuities only if you withdraw money before your payout phase. Over the years, your surrender charges decrease, and then disappear when your payout phase begins.
2. Mortality and expense risk charge: This charge equals a certain percent of the account value of your variable annuities. It serves as compensation to the insurance company for the risk they take by providing you with your variable annuities.
3. Administrative fees: These fees can be either fixed or based on a percentage of your variable annuities. They are deducted by the insurance company to cover the administrative expenses of keeping your account and providing you with variable annuities.
4. Underlying fund expenses: These are the fees paid indirectly for the mutual funds your variable annuities are tied to.

Always make sure to ask thorough and specific questions before investing in annuities. Being informed is the most important essential with variable annuities; you should know and understand as much as possible before you make a decision.