Variable Annuity

MoneyBestPal Team
A type of contract between you and an insurance company, where you make a series of payments or a single payment, and in return you receive payments.

A variable annuity is a sort of agreement between you and an insurance company in which you make a single payment or a series of payments in exchange for future recurring payments. 

Your payout will be based on how well your chosen investment options, including mutual funds, perform. A variable annuity's value can change over time and may rise or fall, in contrast to a fixed annuity, which pays a guaranteed sum.

The accumulation phase and the payout phase are the two phases of a variable annuity. You put money into your annuity account during the accumulation phase, and your earnings increase tax-deferred. Normally, you can change between various investment options without incurring taxes or other costs. You get consistent payments from your annuity account during the payout phase, either for a predetermined amount of time or for as long as you live. You have the option of selecting payments that are fixed at a specific amount or payments that change depending on the success of your investments.

A variable annuity may offer some benefits, such as:
  • Tax-deferred growth: Taxes on your earnings are not due until you take money out of your annuity account.
  • Lifetime income: Payments are made for as long as you live, which can prevent you from using up all of your funds.
  • Death benefit: Your beneficiary may get a certain sum or the value of your account, whichever is higher if you pass away before payments begin.
  • Flexible investment options: Depending on your objectives and risk tolerance, you have a range of investment options to select from.

However, a variable annuity also has some drawbacks, such as:
  • High fees: You can be required to pay a number of fees and charges for your variable annuity, including administrative, surrender, investment management, and rider costs, as well as mortality and expense risk charges. These costs might cut into your principal and lower your returns.
  • Investment risk: In the event that your investments underperform, your variable annuity may lose value. If your payments do not keep pace with the increase in living expenses, you may also be at risk from inflation.
  • Tax penalties: In addition to paying income taxes, you can also be subject to a 10% federal tax penalty if you take money out of your variable annuity before age 59 1/2. If you move money to another annuity in the same year, you risk losing some of the tax advantages of your variable annuity.
  • Complexity: Comparing a variable annuity to other plans and understanding it might be challenging. Before purchasing a variable annuity, you should thoroughly read the prospectus and speak with a financial advisor.

Not everyone would benefit from a variable annuity. Prior to purchasing a variable annuity, you should think about your financial situation, goals, level of risk tolerance, and time horizon. A variable annuity should be compared to other options like mutual funds, equities, bonds, or other varieties of annuities in order to determine its advantages and disadvantages.