Before purchasing a variable annuity educate yourself about exactly what a variable annuity is and what it will mean for you. Consult with your insurance agent and other financial professionals to ask questions. Knowledge is power, or in the case of retirement planning, knowledge is money.
While this article is a general description of what a variable annuity is and how it works you should always request a prospectus from your insurance company, read it carefully and be sure to ask any questions that you can think of. Be sure to compare the types of annuities and benefits as well as fees and payment options of variable and other annuities.
Purchasing a variable annuity means that you make either a single or series of purchase payments, for these payments the insurer signs a contract with you to make periodic payments to you either beginning right away or at a future date.
There is a variety of investment options for variable annuities. The values of the investments you choose vary depending on the performance of the investments. Usually the investment options for a variable annuity are mutual funds invested in stocks, bonds, money markets or a combination of all of these.
While variable annuities are typically invested in mutual funds, there are several important differences between a mutual fund and a variable annuity.
First, variable annuities pay you in periodic payments for your lifetime or the lifetime of your spouse of beneficiary. This protects against you outliving your assets after retirement.
Second, variable annuities can have a death benefit that means that if you die before you start receiving your payments the insurer guarantees that your spouse of beneficiary will receive a specified payment, usually in the amount of your purchase payment. Essentially, this makes a variable annuity a no lose situation, as the money you invested will still be available to your family after your death.
Third, variable annuities are tax-deferred investments. What that means for you is that you will pay no taxes on the income earned on the investment until you withdraw your money. You can also transfer your money from one investment to another one without paying taxes on the investment at that time. However when you do take the money out of a variable annuity you will be taxed on the income at regular income tax rates, this means that in order to enjoy the tax deferred benefits of a variable annuity you should purchase it as a long term investment.
The prospectus for a variable annuity is an individual’s most important piece of information. The prospectus will tell you about all of the investment options, yield, and rates ad well as fees and charges incurred. The prospectus will also tell you about the payment options for your earnings and the time frames. Read the prospectus carefully before purchasing a variable annuity, and consider all of your options. An annuity is the basis of your retirement income and you do not want to make the wrong choices and not have enough income as a retiree.
