Variable Annuities: Annuities with Investment Options

What is a Variable Annuity
A variable annuity is a long-term, retirement investment program offering the compounding power of tax deferral on earnings and an opportunity to have a guaranteed income for life. You purchase a variable annuity contract by making either a single purchase payment or making a series of premium payments. The insurance company then agrees to make periodic payments to you, beginning either immediately or at some future date. The value of your variable annuity depends on the performance of the investment options you select.

A variable annuity has the potential to earn tax-deferred interest on investment earnings. Because no income tax is paid on the investment earnings until withdrawing begin, the money may compound at a faster rate and potentially may grow into a larger nest egg.

At retirement, you may choose among several options of payout. For example, you may want to receive income payments for the rest of your life, for the rest of your and your spouse’s lives, or for a specific number of years or withdrawing the money as one lump sum.

Advantages of a Variable Annuity

• Tax-deferred growth - No income taxes are paid on the earned interest, dividends and capital gains as long as the money remains in the contract.
  
  
• No initial sales charge - 100% of the money goes to work for you immediately. A contingent deferred sales charge may apply.
  
  
• Guaranteed death benefit - If you should die before payouts begin, your beneficiaries are guaranteed to receive 100% of the amount invested or the value of the contract free of probate.
  
  
• Investment flexibility - You can choose among diversified variable portfolios and a fixed rate option.
  
  
• Lifetime Income - You can choose from a number of income options.
  
  
• Withdrawal privileges - You can withdraw all or part of your money at any time before payouts begin. After the first contract year, 10% of the contract value may be withdrawn free of surrender charges. 10% of most 1035 exchanges and IRA transfers or rollovers are eligible for free withdrawal during the first contract year.
  
  
• Affordable minimum investment - As little as $500 will get you started in a flexible payment plan. The minimum for subsequent investments is $100.
  
  
• Dollar Cost Averaging - Monthly transfers can be made automatically from the money market fund to any of the other investment options offered under the contract.

Subaccounts in a Variable Annuity
A variable annuity offers a range of investment options. The value of your investment varies depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three. If your subaccounts perform beyond expectation, you receive all the benefits of that performance. But if your subaccounts perform poorly or lose value, your returns will also suffer and can lose value. With a variable annuity, you bear the risk.

Getting financial advice

New investors may feel uncomfortable choosing their own variable annuity subaccounts. Usually a financial professional can help you determine your risk tolerance and explain your options. This will help you choose the subaccounts that are best suited for your risk tolerance.