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What is a Variable Annuity ? A Variable annuity is a contract between you and usually an insurance company, where the insurance company agrees to make periodic payments to you in the future for a specified term or amount. In turn, you purchase this annuity with either a lump sum or a series of payments over a period of time. Variable annuities have become a very popular investment tool used by many Americans for their retirement planning. Before buying a variable annuity for your retirement there are several factors that must be taken under consideration. Variable annuities are designed to be long term investments usually meeting retirement planning goals or other long term goals. They are not suitable as short term investment vehicles. A prospectus from the insurance company is a good place to start when considering the purchase of a variable annuity. In general, the prospectus will explain the annuity contract, fees and expenses, investment options, payout provisions and death benefit options that are available. Key Features of Variable Annuities A variable annuity offers a much wider range of investment options than regular fixed annuities. The value of a variable annuity contract will vary due to the performance of the investment options selected by the contract holder. The investment options commonly available in variable annuities are similar to mutual funds. The options may include stocks ,bonds, money markets and a fixed guarantee rate option. Variable annuity sub accounts are quite similar to mutual funds in their diversification. The major differences between the two are variable annuities offer payout options, they have a death benefit sometimes equal to at least your initial purchase price and most importantly, they are tax deferred. Variable Annuities and Tax deferral The tax deferral feature of variable annuities is one of the major benefits of using it for retirement planning. The investment gains inside of the variable annuity contract grow tax deferred until you begin to withdraw the money. There is also no tax consequences should you decide to move money between the different investment options of the variable annuity contract. Variable Annuities and Death Benefits The death benefit options in variable annuities often differ from one company to the next. In most cases the death benefit of most variable annuities is usually the greater of the money in the contract at the date of death or a guaranteed minimum usually the amount representing your purchase payments less any withdrawals. Certain variable annuities offer a death benefit equal to the higher of (1) your account value at death, (2) the highest contract anniversary value in any given year prior to death, (3) or a specified guaranteed interest rate compounded on purchase payments to death. In most cases the highest value of these choices is available to the beneficiary. One key point to remember is that mutual funds and other conventional investments do not offer death benefit options similar to variable annuities. Variable annuities are more advantageous to you in this area of planning for your beneficiaries and estate. Variable Annuities and Living Benefits Guaranteed monthly income benefits (GMIB) is a living benefit offered by some Insurers as a way to protect your contract value against potential market losses. This feature guarantees a guaranteed minimum of annuity payments regardless of how the market performs while the annuity contract is in force. The value of this feature is usually stated as a specific interest rate compounded annually on your initial investment or series of payments. Variable Annuity Living and Death Benefits (Costs) There is a charge for the benefits previously discussed and they do vary from one company. Carefully examine the company's prospectus for explanations and costs of these benefits. Variable Annuity Costs , Fees ,Charges and Expenses Most variable annuities have administrative fees that are deducted from your account value either on a flat annual basis or expressed as a percentage of your account value. Fund and or Investment management expenses are often assessed by the money managers that professionally manage the investment sub-accounts. Mortality and Expense risk charges are usually stated as percentage of your account value and typically cover the cost of selling the variable annuity and the insurance risks the company assumes under the annuity contract. Surrender Charges Variable annuities offer liquidity and access to your account value unlike Certificates of Deposit. Generally, the surrender charge is stated as a percentage of the amount that is withdrawn over the free amount that is allowable from contract. Surrender charges vary in amount and period from one company to the next. Most companies usually allow free withdrawals of 10% of your contract value per year without penalty. There are also companies that provide cumulative free withdrawals for greater liquidity. Key Points to Consider when evaluating Variable Annuities are Will it be used for a long term purpose? Do you understand risks associated with different investments (stocks, bonds etc)? Do you understand the fees and charges associated with the variable annuity? Have you evaluated your needs for the features of the variable annuity and do you understand what the features are? If you are exchanging an existing annuity for a variable annuity are there any surrender charges? Variable Annuities are excellent retirement planning vehicles if used properly. Carefully evaluate the features, costs and investment options of a variable annuity before you purchase one. Contact a professional for a variable annuity quote, brochure and prospectus before your purchase so that you may find out as much as possible about the product.
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