Variable Annuities

Shawn Plummer

CEO, The Annuity Expert

What is a Variable Annuity?

A variable annuity is a type of investment product offered by insurance companies. It allows individuals to invest their money in various investment options, such as stocks and bonds, within the annuity. The value of the annuity can fluctuate based on the performance of these investments, providing growth potential.

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Our Variable Annuity Calculator is an annuity calculator that estimates the lifetime withdrawals generated from a guaranteed minimum withdrawal benefit.

Variable Annuity

How Do Variable Annuities Work?

Variable annuities work by investing initial capital, often aimed at future retirement. Variable annuities may invest premiums in various investment options, typically mutual funds. The annuity’s value fluctuates based on the investment performance. At annuitization, the investor starts receiving payments, the amount of which depends on investment outcomes. These annuities offer tax-deferred growth and often include guarantees but can be complex and fee-heavy. They balance potential growth with certain risks, necessitating careful consideration before investment.

Why Buy Variable Annuities?

  • Variable deferred annuities offer tax-deferred growth potential, allowing investors to accumulate wealth without immediate tax implications.
  • They provide an income stream in retirement, with the possibility of increasing payouts if investments perform well.
  • Many come with death benefits, ensuring a guaranteed amount to beneficiaries upon the holder’s death.
  • Additionally, some offer riders for added protection, like minimum income guarantees.
  • However, they should be chosen after evaluating variable annuity fees, investment options, and individual financial needs, as they might not be suitable for everyone.

Who Should Consider Variable Annuities?

Individuals seeking tax-deferred investment growth, the potential for increased retirement income based on market performance, and additional features like death benefits should consider variable annuities. They’re suitable for those who can tolerate market volatility and seek a balance between risk and potential reward. Investors planning for long-term goals, especially retirement, and those who’ve maxed out other tax-advantaged accounts, like IRAs or 401(k)s, might find them beneficial.

What Is A Variable Annuity?

When Is The Best Time To Get A Variable Annuity?

The best time to purchase a variable annuity contract is when an individual has a long-term investment horizon, typically aiming for retirement. It’s ideal for those who’ve already maxed out other tax-advantaged retirement accounts like IRAs or 401(k)s. Purchasing during periods of lower market valuations can offer growth potential. However, timing should align with one’s financial goals, risk tolerance, and future income needs.

How Do Variable Annuities Work?

Variable Annuity Pros And Cons

ProsCons
Tax-Deferred Growth: Earnings grow tax-free until withdrawal, potentially increasing compound growth.High Fees: Can include mortality and expense charges, administrative fees, and fund expenses.
Investment Options: Offers a range of investment choices for customization based on risk tolerance and goals.Investment Risks: The value of investments can fluctuate with market conditions, potentially decreasing the value of the annuity.
Income Stream: Can provide a steady income during retirement.Complexity: Often difficult to understand due to complex structures and terms.
Death Benefits: May guarantee that beneficiaries receive a specified amount, often at least the total purchase payments.Surrender Charges: Early withdrawal can lead to substantial fees and tax penalties.
Riders: Optional features (e.g., living benefits) can add protection against market downturns or guarantee lifetime income.Tax Penalty: Withdrawals before age 59½ may incur additional tax penalties.

This table provides a general overview. The details, variable annuity benefits, and drawbacks can vary based on the contract and the issuing company.

Variable Annuity Pros And Cons

How Variable Annuities Compare

Variable
Annuity
Fixed Index
Annuity
Fixed
Annuity
Immediate
Annuity
Principal ProtectionNoYesYesYes
Access To PrincipalYesYesYesNo
Control Over MoneyYesYesYesNo
Tax-Deferred GrowthYesYesYesNo
Guaranteed GrowthNoYesYesNo
Guaranteed IncomeYesYesYesYes
Inflation ProtectionYesYesNoYes
Death BenefitYesYesYesMaybe
Long-Term Care HelpYesYesYesNo
Variable Annuity Definition

Next Steps

In conclusion, variable annuities can be a valuable tool for confident investors, particularly those looking for long-term, tax-deferred growth, an income stream in retirement, or a death benefit for their beneficiaries. However, due to their fees and potential for loss, they might not suit everyone. As with any financial decision, it’s essential to fully understand the product and consider your circumstances and goals before investing.

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Frequently Asked Questions

What happens to a variable annuity when I die?

Upon death, your variable annuity’s designated beneficiaries receive the contract’s value or a guaranteed minimum amount, avoiding probate. The specifics depend on the annuity’s terms and chosen death benefit option.

Can you lose money in a variable annuity?

Variable annuity risk is the possibility of losing money in a variable annuity if the investments perform poorly.

What is wrong with variable annuities?

Some people believe that variable annuities are too risky because the value of the annuity can go down and up. However, this is true of any investment, and with a variable annuity, you can earn a higher return than a traditional fixed annuity. Unfortunately, variable annuities also come with fees ranging between 3% and 4% annually, which eat into your retirement savings.

When can I withdraw from my variable annuity?

Withdrawals from a variable annuity are available during retirement, starting at 59 1/2. You may also be subject to a withdrawal penalty if you withdraw funds before.

How are variable annuities paid out?

Variable annuities are paid out much like a traditional fixed annuity. You can receive your payments in a lump sum or over some time. The amount you receive each month will depend on the performance of the investments within your annuity.

How does a variable annuity work when you retire?

A variable annuity can provide you with a stream of income during retirement. The amount you receive each month will depend on the performance of the investments within your annuity.

What is the difference between a variable annuity and a mutual fund?

A mutual fund is an investment vehicle that allows you to pool your money with other investors to buy stocks, bonds, or other securities. A variable rate annuity is an insurance product that allows you to invest your money in various options. The value of the annuity will fluctuate depending on the performance of the investments.

What are some of the disadvantages of a variable annuity?

Variable annuities come with fees ranging between 3% and 4% a year, eating into your retirement savings. They also have complex fee structures that can be difficult to understand. Additionally, the value of the annuity can go down and up, which means you could lose money.

What is the difference between a variable annuity and a traditional annuity?

A traditional annuity is an insurance product that provides you with income during retirement. A variable annuity also provides you with a stream of income during retirement. Still, the amount you receive each month will depend on the performance of the investments within your annuity. Additionally, a traditional annuity is a fixed product, meaning the payments you receive are guaranteed, while a variable annuity is not.

What is a variable annuity contract?

A variable annuity contract is an investment product offered by insurance companies that allows the policyholder to invest their premium in various investment options, such as mutual funds. The investment returns and the value of the contract can fluctuate based on the performance of the underlying investments. The policyholder can choose from a range of investment options and can switch between them as market conditions change.

Are variable annuities a good retirement investment?

Variable annuities can benefit long-term retirement planning, offering tax-deferred growth, income streams, and investment flexibility, but they require careful consideration due to associated fees, complexity, and market risk.

What are the risks associated with variable annuities?

Variable annuities carry investment, market, longevity, interest rate, surrender, complexity, and fee risks that can reduce investment value and income.

What is the definition of a variable annuity?

The variable annuity definition is an investment product usually offered by insurance companies. It allows individuals to invest their money in various funds and provides growth potential. However, the value of the investment can also decrease based on market performance. This makes variable annuities a higher-risk option compared to fixed annuities. The payouts from a variable annuity are based on the performance of the investment, making it a popular choice for retirement planning.

Which two entities regulate variable annuities?

Variable annuities are regulated by state insurance commissioners and, for sales practices and disclosures, by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC).

What is an interest sweep in a variable annuity?

An interest sweep is typically performed on a monthly basis. The process begins by calculating the excess cash that is available in the portfolio. This excess cash is then swept into the investment option with the highest rate of return. For example, if you have a portfolio with $100,000 and an interest rate of 0.75%, you would have $750 in excess cash that could be swept into another subaccount.

How do you reallocate funds in a variable annuity?

Variable annuities allow you to invest in various subaccounts. Reallocating funds may involve switching your investments from one subaccount, such as moving from an equity subaccount to a bond subaccount, to adapt to market changes and your risk appetite.

What are the variable annuity guarantees?

Variable annuity guarantees are provisions offered by insurance companies that ensure a minimum level of income in retirement, regardless of market performance. These guarantees protect investors from the risks associated with market fluctuations and offer a steady income stream during retirement.

How do benefit payments fluctuate over time in a variable annuity?

Benefit payments in a variable annuity can fluctuate over time due to changes in the performance of the underlying investments. If the investments perform well, benefit payments may increase. However, if the investments perform poorly, benefit payments may decrease. This variability makes variable annuities a popular choice for individuals seeking potential growth, but it also introduces risk.

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Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed insurance agent and annuity broker with over a decade of first-hand experience. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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