Top 3 Reasons to Choose a Variable Annuity

By Compuquotes Team on October 16th, 2009


Variable annuities can offer multiple rewards to investors while they accumulate funds and during their retirement.

Among the many options for saving for retirement are annuities, which insurance companies offer as a tax-deferred way to earn interest or dividends on savings and guarantee a steady income for retirees.

Fixed or Variable Annuities

The first decision to be made by annuity investors is whether to opt for a fixed or variable annuity. For a fixed annuity, the insurance company guarantees a minimum rate of interest while money is accumulating in the annuity, along with a guaranteed minimum payment in the distribution phase.

While variable annuities do not carry that same guarantee, they offer investors a chance for a higher rate of return by investing in different options, typically mutual funds. The payments in the payout phase will vary according to the dividends earned by the chosen investments. Investors can usually shift from one investment to another during the accumulation phase.

Top Reasons to Choose a Variable Annuity

1. Guaranteed Payments

Variable annuities are available from insurance companies with a variety of options which investors can use to improve their financial security during retirement. Many investors choose to have their annuity payments at regular intervals, such as monthly, throughout their lifetime or the lifetime of their spouse.

Other options allow you to take the annuity distribution over a specific period of years in either annual or monthly withdrawals. Some insurance agencies offer for an additional fee the service of guaranteed returns on your principal to assure the guaranteed withdrawal benefits.

2. Tax Deferment

Regular savings accounts and other investments such as Certificates of Deposit or money market funds are not protected from income taxes, so savers may find that the even with the interest they are earning they are not accumulating enough money to beat inflation and reach retirement with significant funds.

A variable annuity is among the best vehicles for retirement savings. Your investment accumulates on a tax-deferred basis until you begin making withdrawals from your principal fund. The investment returns are taxed only once the annuity owner begins taking withdrawals. The annuity can accumulate greater returns as the dividends are reinvested year after year without being eroded by taxes.

With this appreciation, a variable annuity is at least able to counter negative inflationary effects. In addition, variable annuity investors can maximize their earnings with careful investment strategies.

When taxes must be paid on the accumulated dividend and interest income, the tax rate is generally lower for a retiree rather than people at the height of their earning power. The taxes are calculated by a formula which compares the amount of money invested in the annuity with the amount earned over time and the length of the installment payments.

3. Guaranteed death benefits

Another important benefit of variable annuities is the guaranteed death benefit. When the annuity owner passes away, the designated beneficiary receives the greater of two potential payments: either the full amount of funds in the annuity or a guaranteed minimum death benefit, such as all purchase payments minus all prior withdrawals. Some annuities even allow for a "stepped-up" death benefit which can increase the amount available for your beneficiary.

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