Variable Annuity Guide

Variable annuities have many features and can be a great retirement investment that is secure, they are typically used in retirement planning and keeps income invested for 5 or more years. They have a higher risk, but stronger growth than a fixed annuities, and they are best for long term investment and not suited for short term goals.

Variable annuities is a contract between you (the annuitant) and a life insurance company. It can be purchased with payments over a finite length of time or in one large payment. The premium is then divided into different sub-accounts and essentially invested into funds of varying risks, such as: mutual funds, stocks, bonds or money market accounts. Most importantly is that you make the ultimate decision on how to invest it. Annuities can be tax deferred which is a great advantage when coupled with a well diversified financial portfolio.

Similar to life insurance, variable annuities have death benefits and additional riders can be purchased at various times to enhance the death benefit.

If you decide to invest in variable annuities; request a prospectus before making your final decision. A prospectus includes very important information about the annuity contract, including but not limited to: interest rate, fees and charges, death benefits, surrender charges, and payout options. The prospectus can also give you the opportunity to compare different annuity and investment options to determine which one is best for you. You may discover that a mutual fund or CD will give you the same, if not better return on investment or benefits.

Types of Variable Annuities

* Deferred - Deferred annuities have four distinct features.

1. The contract is created and paid into with payments at regular intervals.
2. When the contract is being paid into that is referred to as the "accumulation phase".
3. Pay out of distributions does not begin until AFTER the accumulation phase is completed. In addition, the interest earned is compounded and tax deferred.
4. The surrender fees typically are much higher.

* Immediate

1. Contract is paid into with one single large payment.
2. Creates monthly cash flow by paying out immediately.

Features of Variable Annuities

* 1-10 year terms
* Payout Phase- gives you periodic payments
* Death Benefits- Similar to life insurance a death benefit is an option which saves you money from purchasing a separate policy.
* Tax Deferred
* Inheritance- Principal and interest earned can be passed on to loved ones estate tax and probate free.
* Premiums are Flexible- Pay in periodic payments or in one lump sum.
* Accumulation Phase
* Flexible Growth- Annuities can be shifted to give conservative to aggressive growth

Although variable annuities are often invested in mutual funds, more so than stocks or bonds, they are different in some key features.

1. Generate monthly cash flow with the periodic payments during the annuitization period for the rest of your life. This protects you from outliving your assets after retirement. The interest earned is dependent upon the investments chosen during the creation of the contract.
2. Variable annuities have a death benefit- if you expire before the annuitization period begins then your beneficiary will receive the pay out. Thus it is similar to life insurance in this respect.
3. Tax deferred- investment gains of a variable annuity is tax deferred until you withdraw money.

How does a Variable Annuity Work?

Variable annuities can be complicated, but when it's broken down into it's key features it's much easier to understand.

There are two main phases: the accumulation phase and annuitization phase.

During the accumulation phase, which can begin at any time during your work life or retirement, you make contributions into your variable annuity, it can be as one single large contribution or smaller contributions at regular intervals. Those contributions are then allocated into several sub-accounts; For example, if you have a $20,000 investment, you can allocate 30% into an international stock fund, 20% into a bond fund and 50% into a US stock fund. Depending on how these funds perform will determine if they increase or decrease over time. In addition, you can allocate a portion of your investment into a fixed account which can give your investment some stability. During this phase you can continue to contribute into the annuity and have it tax deferred.

In addition, you can transfer your money into different accounts without penalties. But, if you withdraw your money during this phase there may be "surrender charges" as well as federal tax penalties.

The annuitization phase is when you begin to receive payments from the earnings and principal of your investment. In addition, you have many options on how to receive this pay out: it can be in one lump sum or structured as monthly payments to create cash flow. You can also structure it to pay out for finite length of time, such as 30 years. This is where you are protected if you outlive your retirement, for example if your retirement sustains you for 20 years, but your annuity payments are structured for 30 years, then you have an additional 10 years of cash flow. You can also choose to have fixed payments or variable payments based on the performance of your sub-accounts.

What are the Disadvantages of a Variable Annuity?

What are the Advantages of a Variable Annuity?

Variable Annuity Death Benefit

But, what if you die before those 30 years are paid? This is where the death benefit is important. If you have a death benefit in your annuity and you expire before the annuitization phase is completed, the pay out will transfer to your beneficiary. For example: You've structured your payments for 30 yrs of monthly payments, but you die 15 years into it. Your beneficiary will receive the remaining monthly payments for the remainder of the annuitization, which in this case is the additional 15 years. You can also choose to have your annuity payments pay out indefinitely for you and your beneficiary.

Some other features are the "stepped up" death benefit and long term care insurance.

Something to consider is that once you start receiving annuity payments you cannot withdraw money from account.