Variable Annuity Account: A Long-Term Investment Option

By Compuquotes Team on March 27th, 2008


People invest in annuities because it ensures them a lifetime of regular income. An investor is likely to have either one of the two common annuity accounts: fixed annuity or variable annuity. A fixed annuity account earns a fixed interest, which has been set by the insurance company. Consequently, the annuity payments are of the same amount. In a variable annuity, the account earns based on the performance of the investment portfolio. As a result, the amount of annuity payments also varies - larger when the market performs well.

When you are planning for a long-term investment and are considering purchasing an annuity, you may be better off with a variable annuity. When you purchase a variable annuity, you are given the option on how to allocate your money on different funds such as stocks and bonds. As stated earlier, the amount of growth of your annuity account is dependent on the performance of these funds. Because of this, variable annuities are high-risk investments. The stock market is very volatile and could rise or drop at any given moment.

But to reiterate, if you are in for a long-term investment, the short-range performance of the market does not really matter. This is because, even with the impending recession, the market always gets better in time. Stocks that are worth $1.84 in 1980 are now worth $78.61. As you can see, your variable annuity account will gain even with dips in the stock market, provided that your money stays in the annuity long enough. Saying that the market always gets better is not just an overly-optimistic statement. Looking at the trend, it always does.

For short-term investments, however, variable annuities (or any annuity for that matter) may not be the answer. First, every annuity account is laced with hefty surrender charges. This means that if you take out a portion of the annuity or surrender all of it in exchange for a lump sum before the surrender charge expires, you have to pay a surrender charge. The charge is usually a percentage of your account value, which could be as high as 9%. Aside from surrender charges, you also have taxes to pay. Withdrawals from the annuity are subject to tax unless the intention for the withdrawal is for disability or death. Furthermore, if you surrender your account before you're 59 years old, you get to pay a 10% tax penalty on top of the surrender charges.

Not all variable annuities work the same way. It is best to find a variable annuity with low costs and good investment options. The rating of the insurance company offering the annuity, as well as the performance of its fund managers, also matter. A little research regarding this matter goes a long way. If you do find a variable annuity with better investment choices but already have an existing annuity account, you can always make us of the 1035 Exchange which allows a tax-free exchange between annuity accounts. Just make sure that the surrender charges for your first annuity have already expired before making the exchange.

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