Getting Started With Variable Annuities
If you’re considering a variable annuity, this article will provide you with the information you need to gain an understanding of these investments and hopefully, help you to make a good decision about these investments.
Any kind of annuity insurance, including variable annuities is a legally binding contract between an insurer and an investor. The person investing in the annuity pays the insurer in the form of a lump sum payment or on an installment schedule.
The investor then receives payments consisting of a portion of the principal as well as the interest earned by said principal on an ongoing basis. These payments may continue for life or for a set period of time as stipulated by the contract.
One of the chief advantages of a variable annuity is the amount of flexibility the investor has as to how their payments are invested. Typically, the insurer will provide investors with a menu of investment options, largely stocks and bonds.
With a variable annuity, investors have the ability to invest their money in vehicles which are outside of the annuity proper, but also enjoy the tax deferral benefits of an annuity.
Variable annuities generally also include an option to convert the annuity to a fixed annuity. During the life of the annuity, the investor may choose to keep their payments invested in stocks and bonds, with the value of their investment fluctuating with the markets. Alternately, the investor can opt for a fixed interest rate if they would prefer to avoid the risks of the stock market.
You can also allocate a section of your payout to any fixed account that will render you a fixed interest rate. So even if you keep shifting your investment you need not be paying any tax on the income gains until you receive payment. In the payment phase, you could be getting your payments and gains as a lump sum or if you wish so, you could stagger it as a range of regular payments.
Historically, major US stock markets have provided investors with great returns. As we’ve seen, they can greatly drop, however, over the long-term, most economists and experts believe the stock market to be a good investment. A variable annuity allows you to receive the tax deferral benefits, while allowing you to flexibly invest in the stock market.
Before deciding on a variable annuity, investors do need to keep in mind that there are costs associated with these annuities which can be upwards of 3%. You’ll want to make sure that you understand both the costs and benefits before choosing variable annuities as a way to invest.
Category: Finance
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