Variable annuities have quickly become the large part of Americans’ retirement and investment plans. You’ve heard about them, but what are they?
A variable annuity is a contract between you an insurance company where the insurer agrees to make periodic payments to you, which will begin immediately or at a later date that you decide. You can purchase a variable annuity contract by making a one-time payment or a series of purchase payments.
A variable annuity allows you to choose from a range of investment options such as mutual funds that invests in stocks, bonds and/or money market instruments. The value of your investment will depend on the performance of the investment options that you choose.
Benefits of a Variable Annuity
- Periodic Payments – Variable annuities allow you, your spouse or any other person on the contract, to receive money for the rest of his or her life. This is important because it offers protection to the contract holder who outlives his or her assets during retirement.
- Death Benefits – If you happen to pass away before the insurance company has started to make payments to you, your beneficiary is guaranteed to receive a predetermined amount, which is usually at least the same amount as your purchase payments.
- Tax-Deferred* – You will not pay taxes on the income and investment gains from your variable annuity until you withdraw your money.
Phases of a Variable Annuity
Phase 1 – Accumulation Phase
In this phase, you make purchase payments that you allocate to various investment options. For example, you can allocate 30% in stocks, 50% in bonds and 20% in money market instruments. You have complete control over where you invest your money.
Phase 2 – Payout Phase
In the beginning, you may receive your purchase payments plus investment income and any gains as a lump sum payment. Or, if you prefer to receive cash periodically (monthly, quarterly or annually), the option is all yours. The periodic payment option also allows you to choose how long the payments will last.