What is a Variable Annuity?

A variable annuity is a agreement between you and an insurance company, where the insurance company agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of payments over time.

A variable annuity provides a range of investment options. The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you select. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or a combination of all three.

Even though variable annuities are frequently invested in mutual funds, variable annuities differ from mutual funds in several important ways:

First, variable annuities let you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate). This feature offers protection against the possibility that, after you retire, you will outlive your assets.

Second, variable annuities also have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount – typically at least the amount of your purchase payments. Your beneficiary will get a benefit from this death benefit if, at the time of your death, the value of your account is less than the guaranteed amount.

Third, variable annuities are also tax-deferred. That means you do not pay taxes on the income and investment gains from your annuity until you withdraw your money. You are allowed to transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When you take your money out of a variable annuity, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. In general, the benefits of tax deferral outweigh the costs of a variable annuity if you hold it as a long-term investment to meet retirement goals.

One of the best way of determining which variable annuity is right for you is to get the sound advice of a knowledgable advisor. Click here if you are ready to find out which variable annuity is best for you.