Variable annuities (“VA”) have become a part of the retirement and investment plans for many people. Before you buy a VA, you should know some of the basics – and especially the fees! Be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a VA is right for you.
A VA is a long-term investment vehicle designed specifically
for retirement purposes.
It is also a contract between you and an insurance company,
under which the insurer agrees to make periodic payments to you, beginning
either immediately or at some future date. You purchase a VA contract by making either a
single purchase payment or a series of purchase payments.
A VA offers a range of investment options for you to choose
from. The value of your investment as a VA
owner will vary depending on the performance of the investment options you select.
The investment options for a VA are
typically mutual funds that invest in stocks, bonds, money market instruments,
or some combination of the three.
Although VAs are typically invested in mutual funds,
variable annuities differ from mutual funds in several important ways:
1.
A
VA lets you receive periodic payments for the rest of your life (or the
life of your spouse or any other person you designate). This feature offers protection against the
possibility that, after you retire, you will outlive your assets.
2.
A VA has a death benefit. If you die before the insurer has started
making payments to you, your beneficiary is guaranteed to receive a specified
amount – typically at least the amount of your purchase payments. Your beneficiary will get a benefit from this
feature if, at the time of your death, your account value is less than the
guaranteed amount.
3.
VA
contributions are tax-deferred. That
means you pay no taxes on the income and investment gains from your annuity
until you withdraw your money. You may
also transfer your money from one investment option to another within a
variable annuity without paying tax at the time of the transfer. When you take your money out of a variable
annuity, however, you will be taxed on the earnings at ordinary income tax
rates rather than lower capital gains rates. In general, the benefits of tax deferral will
outweigh the costs of a variable annuity only if you hold it as a long-term
investment to meet retirement and other long-range goals.
It is important to make sure you understand any ongoing costs, because
compounded fees impact your future compounded returns!
Seriously, bro I always find these terms like 'periodic payments', 'tax deferred' etc confusing but thanks to this post. They are no more confusing to me now.
ReplyDeletePeriodic payments simply mean e.g. monthly or quarterly paid to the investor, as per the terms of the policy.
ReplyDeleteTax deferred means that you can invest pre-tax income 'now', and pay tax on the withdrawals in the future. For a Variable Annuity, this is the same as e.g. for 401k plan contributions from one's gross salary, where contributions are tax-deferred (up to certain annual limits).
When plan contributions are paid to the investor (e.g. starting at one's retirement date), the money received (much like any other income) would be taxed at the person's tax rate, based on their location, income, etc. at that time.
Hope that helps.
Hi Rudi, how are you, thank you so much for that graphic table really this variable table made my problem much easy was confused about variable annuity.
ReplyDeleteThanks for the post. I've been looking into my personal finances and I am unsure whether to sell annuity payment in order to take care of some loans, or to try and tough it out until I can get back to work.
ReplyDeletequite insightful, you can learn a lot about an annuity here. I never knew there were so many different types. Now that I am reconsidering my annuity payments, I have found some helpful places I can sell them and get the cash now
ReplyDelete