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What Is a Variable Annuity?

By Compuquotes Team on March 11th, 2009

Annuity

Variable annuities are insurance and investment products that are joined together to create a unique product for retirement. Annuities offer tax deferred savings plans that are insurance like - using an insurance policy to provide the deferral of taxes. Together, insurance and investment provide you with:

  • Tax deferrals on earnings in the annuity.
  • The ability to name your beneficiaries who will receive the balance of the variable annuity upon your death.
  • Annuitization, which means that you will receive payments for the rest of your life based on your life expectancy.
  • Guarantees that are provided by insurance companies.

Variable annuities invest in bonds or stocks and have no definite rate of return. They can offer a much higher rate of return when they are compared to fixed annuities. Variable annuities are investments for retirement. The main reason people purchase variable annuities is for the tax deferred earning status as well as the ability to prolong payments for the rest of their lives. The insurance portion of variable annuities offers guarantees that the full principal that you originally contributed to the account (either in a lump sum or as a savings process over a number of years) will be paid out when you pass away, even if the market value is low during that period.

Variable annuities are different from IRAs in two main ways:

  • The money you put into an annuity is not tax deductible.
  • You can put as much money as you want to into an annuity.

Fixed annuities offer you a straight, standard monthly payment for the term of your annuity. Variable annuities offer you fluctuating payments that are impacted by how the market is doing. You can combine fixed and variable together, creating a minimum monthly payout (guaranteed income) with the potential for some much better paying months when the market is doing exceptionally well.

Annuities are, for the most part, great for people who make a lot of money later in life and are trying to aggressively save for retirement. If you have a large lump sum of money, you can immediately invest that in a variable annuity and have the payments begin right away. You also have the option of a deferred annuity, in which you make payments (like a savings plan) over a number of years to build up the principal amount in your annuity, with a chosen start date (such as when you plan to retire).

It's best to speak with an insurance agent or broker about the various types of annuities that you can chose from. A variable annuity may not be the best investment product for you - you may want to consider one of the various other types of annuities that are available from most insurance companies, or another retirement savings plan all together. In many cases, the age at which you decide to start saving or planning for your retirement will impact the product that is best for you. Before you make any decisions, it's best to research the various products that are available to determine which one will best suit your needs.

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