Variable Annuity

A variable annuity is the ultimate all-in-one investment option, sold by insurance companies and financial institutions, that combines fixed annuity characteristics with the benefits mutual funds. The insurance company or financial institution receives payment in the form of a premium from the investor to purchase accumulation units on behalf of the investor.

Two categories of variable annuities can be identified namely immediate and tax-deferred. In terms of immediate annuities, payments are made via once-off deposit with the insurance company or financial institution promising immediate payments on a monthly basis until you pass away or reach contract end. These monthly payment amounts will be based entirely on your life expectancy or designated period of time. The typical tax deferred variable annuity grows in account that is deferred from tax until payments are taken, at which point it's taxed as regular income for tax purposes.

Tax-deferred annuities are ideal for individuals who want to invest their money and sit back to watch it grow tax-deferred until they decide its time to withdraw the money. Tax-deferred annuities can either be at fixed rate, or a variable product with sub-accounts. The sub accounts within the variable annuity are where it gets its name, as the vary in price according to the performance of the stock or related markets.

Apart from the bad publicity that variable annuities have received the last couple of years as a result of misleading sales methods and inadequate disclosures, some very worthy annuity products are available that are 100% commission-free with low costs, no surrender charges and are without a doubt a remarkable way to invest.

The advantages of annuities, include but are definitely not limited to:

Tax deferral - As with IRA's, contributions and income earned have the potential to grow tax-free until fund withdrawals.

Easy investment adjustment and changes - Due to the fact that variable annuities have sub-accounts you are given the opportunity to pick and choose from an endless selection of mutual funds. Since you're in a tax deferred vehicle you can buy and sell sub accounts without incurring taxes, as you would if you had done so outside if the account. This makes investment direction and changes more focused on the fundamentals rather than taxation..

Constant income for life - Should you decide and select monthly payments on your annuity, financial institution or insurance company will promise constant income payment until the day you die.

Protection of your assets- In some States, annuities enjoy protection from creditors. Should you be employed in an economically unstable occupation, annuities can be a great vehicle for saving. They also offer a guaranteed death benefit that is typically the amount you start with minus withdrawals. So, regardless of market conditions, you're heirs are assured certain peace of mind against decline.

Enhanced guarantees - Many variable annuity companies have added enhancements or riders to their products in recent years. These range in the benefits they provide. They often consists of living benefits that offer specific guarantees or income options. Some provide interest guarantees that require annuitization or other requirements. These can be beneficial for the right person, but do commonly come at an additional cost.

It's a fact like no other, the sound of income for life is a wonderful thought, there is however one major disadvantages to annuities, annuitization of a contract, is final. So, be sure to think things through before annuitizing any annuity contract.

Not really sure what we are talking about? Well, let's look at an example then. Let say you put US Dollars 200,000 into an annuity at age 70 and accept the insurance company or financial institutions offer to pay you US Dollars 500 per month until you die. You will have to live at least to age 90 to experience an even break on the contract. Should you live past age 90 the insurance company or financial institution will be required to continue with monthly payment, but should you pass away before age 90 the insurance company or financial institution will keep any remaining savings. This means that should you pass away at an early age as 73, the insurance company or financial institution will keep the balance of your US Dollars 200,000. Now, this assumes a life only payout. Choosing a life with period certain is much more common. Though the life only payout will provide a greater income to the individual who chooses it, assuming he has no desire or need bequeath funds. Nonetheless, before selecting payout, you need to decide whether annuitizing will be to your benefit and ultimately, this will depend on how long you think you will live.

Another disadvantage- Another disadvantage is that once you place your funds into an annuity contract, the funds should remain there until age 59.5 is reached, or else a 10% penalty will be payable to the government. These act much like your IRA, in that they gropw tax deferred, but you must wait until the appropriate age for withdrawal. When you do decide to take funds from the annuity contract, the portion of payments considered investment gains are taxed at an ordinary income tax rate rather than a long-term capital gains rate. This could be a much higher rate for some people when compared to the current capital gains rate.

Surrender Charges- Insurance companies and financial intuitions come with surrender fee charges. These fees start on a diminishing scale of anything from seven- to eight-year, starting at an estimated 8% in the first year decreasing steadily to 0% year eight. This means a US Dollar 100,000 annuity investment could potentially cost you US Dollars 7,000 in surrender fees. There are, however, variable annuities available that don't have these fees.

Expenses - Variable annuities are more expensive than your standard mutual fund products. Since they are considered a subset of life insurance they carry with them certain mortality and expense fees that are charged on an annual basis. These fees cover the insurance company expenses associated with administration and risk to insure against death. In addition to these, the expenses of the individual sub accounts is added. These costs can add up, especially in declining markets.

A variable annuity is actually a very straight forward agreement between an investor and an issuing insurance company or financial institution. Annuities have the potential to be extremely useful as investment vehicles if you've exhausted other tax-deferred retirement options, it is however absolutely essential for you to do proper research on the contract before making your final decision. You should learn stock market investing prior to utilizing market timing methods that variable products provide, as there are certain risks. Most of the time, the purchase of a straight forward mutual fund in a taxable account, would come highly recommended. Should you at this point in time be stuck in an poor performing annuity, charging yearly expenses in of excess of 3%, it may be time cut loses and sell annuity proceeds. Tons of insurance companies and financial institutions live off of the uninformed investor by collecting all kinds of charges and fees. Don't get caught! Like anything else in the financial industry there are good and bad products out there that could benefit you or impair you. Should you choose annuity investing, it's recommended that your shop around first and to compare products and prices until you get one that suits your needs.