Why would you buy a variable annuity?

Shawn Plummer

CEO, The Annuity Expert

In financial planning, investment strategies abound, each with its unique blend of risk and reward. Among these, variable annuities often generate a whirlwind of debate. Though not the perfect choice for everyone, there’s no denying that variable annuities come with distinct benefits that can be a boon for confident investors. If you wonder, why would you buy a variable annuity, then you’re in the right place. This guide will peel back the layers of variable annuities, shedding light on why you might want to consider buying one.

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A Guaranteed Income Stream

One of the primary reasons individuals invest in variable annuities is the prospect of a guaranteed income stream. No matter the performance of your investment, you’ve assured a steady flow of income during your retirement years.

For example, imagine having invested heavily in the stock market, and it crashes right as you’re about to retire. A variable annuity could act as a safety net, ensuring a consistent income despite the market’s instability.

Why Would You Buy A Variable Annuity

Mitigating Longevity Risk

A variable annuity also mitigates what’s known as longevity risk—the risk of outliving your savings. This is a genuine concern for many retirees, given advances in healthcare and increasing life expectancies. A variable annuity can help put these fears to rest.

Tax-deferred Growth

Variable annuities come with the significant benefit of tax-deferred growth. You won’t pay taxes on the earnings from your annuity until you withdraw them, potentially allowing your investments to grow much more rapidly than they would in a taxable account.

Consider an individual in the highest tax bracket who invests in a variable annuity. Over time, their potential earnings could be substantially higher than if they continually pay taxes on their investment growth in a standard account.

Why Buy A Variable Annuity

Tax-Efficient Withdrawals

When you start withdrawing from your variable annuity, you can structure it so that you withdraw your earnings first. This is beneficial because these withdrawals will be taxed as ordinary income, likely at a lower tax bracket than your working years.

Death Benefits

Another benefit of variable annuities is the possibility of a death benefit. If you pass away before the insurer has made all your payments, your beneficiary will receive a specified amount.

This means if, for instance, you passed away shortly after buying the annuity. However, before you had received all of your payments, your chosen beneficiary would still receive some financial benefit.

Why People Buy A Variable Annuity

Next Steps

Variable annuities can serve as a powerful tool in your financial planning arsenal. They offer a guaranteed income stream that can protect you against market instability and longevity risk, tax-deferred growth that may boost your earnings significantly, and potential death benefits for your beneficiaries. However, like all financial products, variable annuities aren’t one-size-fits-all solutions. They come with fees and potential surrender charges and aren’t as liquid as other investments. Hence, evaluating your financial circumstances, understanding the product thoroughly, and consulting with a financial advisor before deciding is crucial.

Why Do People Buy A Variable Annuity

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Frequently Asked Questions

Who should consider buying a variable annuity?

Investors prioritizing stability, long-term savings, and tax benefits may find variable annuities appealing. It is important to note that they are better suited to those with a long-term investment horizon and high-risk tolerance. Additionally, if an investor has already maxed out contributions to other retirement accounts like 401ks and IRAs, a variable annuity may provide an additional tax-deferred savings option.

Can variable annuities be useful tools for estate planning and inheritance?

Variable annuities can be useful tools for estate planning and inheritance. They may offer death benefits to beneficiaries and allow the investor to control the distribution of their assets after their death. This can provide added peace of mind for investors concerned about leaving a financial legacy for their loved ones.

What is longevity risk, and how does a variable annuity mitigate it?

Longevity risk is the risk of outliving your retirement savings due to increased life expectancies, and it’s a significant concern for many retirees. A variable annuity can mitigate this risk by providing a guaranteed stream of income that lasts for the rest of the investor’s life or a fixed number of years, regardless of how long they live. This can provide peace of mind and financial security during retirement.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

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

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