Just as is the case with any annuity, a variable annuity is a contract between you and the insurance company. Variable annuities are tax-deferred contracts that allow you to make a choice between some investments. After retirement, the insurance company pays you out some income depending on the payout of the investments that you chose.
They are, therefore, together with fixed annuities, a highly preferred method of saving for retirement by most seniors. The major difference between a variable annuity and a fixed annuity is the fact that the latter will pay out a guaranteed amount as opposed to the varying amounts of the former.
Features of Variable Annuities
Often, variable annuities are compared to mutual funds. This is because they offer almost similar investment features. However, variable annuities will typically have these three features that are not found in mutual funds.
- Tax-deferred earnings
This basically means that the income and any gains made from your investment will not be subject to any taxes until you make your first withdrawal. You are also able to transfer the gains from one investment option to another. However, once you make your first withdrawal, your gains will be subject to the existing tax rates. - Death benefit
The payouts from a variable annuity are usually set to start at a specified date in the future. In the event that you die before you have started making claims on the annuity, your beneficiary is entitled to receive a death benefit from your insurer. With this feature, your beneficiaries will be able to receive an amount that is not less than the initial premium payment you made. - Periodic payments
With a variable annuity, you get periodic payments all through your life after retirement. It is, therefore, a safe way to ensure that once you are retired, you do not outlive your assets.
Types of Variable Annuities
As is the case with other annuities, variable annuities are divided into two major types depending on the beginning of the payout period.
- Immediate variable annuity
In this case, the investor deposits a lump sum with the insurer. The insurer begins to make annuity benefits almost immediately. Usually, the period between the lump sum deposit and the beginning of payout is 60 days. - Deferred variable annuity
With the deferred annuities, an investor makes a deposit for the investment. The deposit can either be made as a lump sum or as periodic payments. The annuity benefits are then deferred to a later specified date at which the insurer can either pay as a lump sum or as periodic payments.
There really is so much more that pertains to variable annuities. If you feel confused, do not worry. Contact us today and we will be glad to tell you more about the variable annuities.