How Variable Annuity Works

By Compuquotes Team on March 27th, 2008

Simply put, variable annuities pay variable return at variable rates. So how much return will you get? Just so you know, you need to understand the basics of how a variable annuity works.

Like fixed annuities, variable annuities have comparative features like tax deferment, option for lifetime income payout, even the guarantees. The difference lies in the kind of investment that is made inside the fund. Given a possible mix of bonds, mutual funds, or stocks, rates will most probably be variable. And accordingly, the amount of returns will be variable as these depend on the rates.

One will want to opt for a variable annuity if you want more growth potential (over and above fixed annuities). Can you take on calculated risks on your money? If so, you'll probably go for a variable annuity, too. You will also opt for the variable type if you speculate that sometime soon a new annuity product that will be more suitable for your requirements will come up and you want to be with the flexibility to shift to that new product. Basically, a variable annuity is able to do all these.

Like fixed annuities, variable annuities also charge M&E or mortality and expense fees, administration and operational fees, investment management charges, and even rider (or special benefit) charges. If you opt for the most basic features to be present, fees will generally be lower. But if you want all the flexibility and accessibility built in, expect that these come at a price. Other charges will be levied on your ´┐Żloaded' variable annuity. Just be sure to check if you will really be needing or if you can actually use, the added benefits.

Your variable annuity again will surely offer a wide range of options investment-wise. A mix or combination of stocks, bonds, and other money market or financial vehicles will form your options pool for a variable annuity. Your investments' value varies as the investments in your mix perform accordingly.

The accumulation phase in variable annuities allows you to increase your money in the investment options over time. The payout phase guarantees payment to you of the premium payments plus income and returns. It will be up to you to receive them at regular intervals or in lump sum payment.
The incentive of tax deferment works only if the investment is made over the long term. Given in annuities, variable annuities that gain maximum yields benefit most from the tax deferment incentive.

Variable annuities allow for a sort of trial period during which time you are allowed to terminate the contract without need to pay the attendant pre-termination penalties or surrender charges. You get a full money back guarantee on your payments. This period also allows for you to field all your clarifications and doubts about the annuity. At any rate, it's your money and you are entitled to the benefits of the doubt. Variable annuities may be good for some, but you ought to be sure if it will be good for you, too.

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