What is a Variable Annuity?
A variable underlying securities. The insurer guarantees a minimum payment, but the rate of return on the underlying securities may vary. The performance of these securities, usually mutual funds, dictates the size of the eventual annuity payment.is a contract sold by an insurance company. The contract provides the holder with future payments based on the performance of the contract's
Example of a Variable Annuity
Let's assume you put $300,000 into an at age 60 and the insurance company offers to pay you $1,000 per month for the rest of your life.
$300,000 / $1,000 = 300 months
300 months / 12 = 25 years to recover investment
According to our math, you will have to live until age 85 to break even on the investment, and if you live past 85 the insurance company must continue making payments.
To invest in a variable annuity, the buyer makes an investment with the insurer and allocates this money according to a menu of allowed by the contract. Some insurance companies also asset-allocation funds, which automatically allocate the money in a range of stocks, bonds, and other . The contract grows tax-deferred until the buyer chooses to receive payments ("annuitizes the contract"). Unlike investors who directly own mutual funds, holders may switch in and out of funds and receive year-end distributions from those funds on a tax-deferred basis until the contract is annuitized.
It is important to know that buyers cannot begin receiving gains are taxed at the buyer's ordinary income tax rate. Some insurers allow buyers to make small emergency withdrawals without penalty. In some circumstances, buyers may also exchange an tax-free for another with a different insurance company, which is known as a 1035 Exchange and is governed by Section 1035 of the Internal Revenue Code.payments before age 59 1/2 without paying a 10% federal tax penalty. When payments begin, the contract's
Why do Variable Annuities matter?
Unlike some other tax-deferred retirement vehicles, there are no annual size restrictions on named beneficiaries will receive the greater of the full amount of the original or the account value at the time of the buyer's death, net of withdrawals. Note that heirs must pay ordinary on the capital gains. In some states, variable are also a way to shelter assets from creditors.purchases. Additionally, the insurance feature of a variable guarantees that an owner and/or
Variableare somewhat controversial because of their fee structures and the financial incentives given to some sellers of . Fees associated with variable can include commissions to the seller, fees, management fees, annual fees, application fees, administrative fees, charges for special add-on benefits, annual mortality fees and expense-risk charges. An s underlying also generally carry fees. In addition, surrender charges typically apply to the first several years of a contract's life and serve as a penalty for making withdrawals before a specified period. Exchanging variable may expose the buyer to new fees as well.
National Association of brokers and insurance agents to recommend the purchase or exchange of an contract only after informing a potential buyer about the pros and cons of the and only if the is in the potential buyer's best interest after evaluating his or her personal financial needs.Dealers rules require