A variable annuity has features that make it an attractive purchase. A variable annuity is often seen as a hedge against the ravages of inflation. The time to buy a variable annuity is when you want to establish a long term savings program. Normally the objective of the program would be to accumulate money for retirement. You would consider a variable annuity if you were dissatisfied with the return offered on other annuities. The final consideration is to evaluate your risk tolerance to determine if a variable annuity is the correct contract for you.
In order to purchase a variable annuity you must deal with a registered representative who holds a variable annuity license in your state. This agent receives additional supervision for your safety. This agent will provide you with a prospectus for any fund available in the variable annuity
The primary feature or a variable annuity is that the contract is an annuity. An annuity can provide an income that you cannot outlive. This feature can be different in various variable annuities but the fact that a lifetime income is available is extremely important.
Another feature that would make a variable annuity attractive is that there isn’t any taxation on gain during the accumulation period of the annuity. The gain is reinvested inside the annuity and this compounding effect is very important.
A variable annuity unlike other annuities is not based upon interest, rather it is based upon the performance of underlying investment accounts which you may tailor to suit your specific needs and interests. You are normally granted the right to transfer between investment options without triggering income taxes. Many of these transfers also avoid any fees. There are risks associated with investing in a variable annuity, including loss of principal.
A variable annuity is flexible. It can be changed throughout the accumulation period to meet your specific requirements. You risk tolerance can change over time. The variable annuity will allow you to change the mix of investments held by the variable annuity. If you become apprehensive about the market, there is almost always a fixed account to provide steady interest without fear of loss.
There are fees associated with a variable annuity that are not always found in other annuities. These fees reflect the fact that the value of the annuity is invested, rather than merely earning interest. There are opportunities in most variable annuities to shift from fund to fund and to shift from variable funds to fixed funds. Normally there aren’t any fees for this service.
Like most annuities surrender fees may be applicable. This is because of the long term nature of the contract and can be understood when compared to the early withdrawal penalties that are a part of certificates of deposit. These surrender fees are often waived in the event of disability.
Like other annuities the variable annuity allows you to select a beneficiary. Many variable annuities provide for a guaranteed minimum death benefit that provides some safeguards for your family should you retire before you retire. The death benefit from the annuity would pass by contract to the beneficiary in the event of death avoiding probate expense and delay. Many variable annuities will return the amount of deposits as a death benefit should the value of the annuity be less.
That is an excellent question! Here's what you need to have to want to purchase a variable annuity. A.) A lot of money that you are willing to lose. These annuities do not guarantee that your investment choices will perform well enough to make money, nor that you won't lose the money that you invested. Be aware that this is a possibility. B.) A lot of extra money that you want to pay in fees. These annuities have all the regular fees associated with annuities, and extra ones to boot. C.) A good understanding of the market, and the investment histories of the choices you are offered. Far too often, clients know nothing about the performance history of the options they are given to allocate into, and make unwise choices. If you have all three of these things, then this may be the annuity for you, if not, maybe a different one would be better. Thanks for asking!
Jim Winkler gave you a good answer. I'll simplify it for you: NEVER
A variable annuity is like buying plain old mutual funds, except with higher fees and being taxed at a notably higher rate when you (or your heirs) actually try to get the money out. (There's a really lousy life insurance policy that goes with it, said life insurance being limited to making up the difference (if any) between the amount you put into the account and the actual value of the account on the day you die, if that actual value is less than the amount you put in. But here's the kicker, over time, mutual funds rarely end up being worth less than the initial deposit you made, so the life insurance benefit is fairly pathetic; I didn't say mutual funds always turn out to have great returns, just that very few people actually end up with less than they put in.)
If you want an annuity, buy a plain old annuity. A plain old annuity doesn't sing or dance, but it will provide a better return than a CD at the bank. If you want to invest in stocks and mutual funds, then go buy some stocks and mutual funds. If you want both, split your money up, and put half in one spot, and half in the other. But trying to marry the two (which is what a variable annuity is attempting to do) will produce the ugliest offspring you ever did see.
So you ask, why do people buy variable annuities? Because there are salesmen out there who recognize that a certain subset of consumers like the imagery of playing the stock market and the safety of an annuity all rolled into one. It's sort of like wanting the fuel efficiency of a Prius and the performance of an Indy car -- most consumers would be smart enough to know they can't have both in the same car, but those same consumers don't grasp that the same holds true for investments. You can have a car that seats 5 and gets 40 miles per gallon, OR, you can have a car that seats 1 and will go zero-to-sixty in 3.2 seconds, but you can't get that in a single car.
Here's an actual example of the ugly that is a variable annuity: Woman rolls over her 401k plan to a variable annuity IRA account recommended by a slick saleslady (after all, women can trust each other, right?). The amount was $24,200, and it was done in fall of 2012. She has withdrawn $5,450 over the 3-1/2 years since the rollover occurred. She now has $20,150 in the account. Real rate of return is between 2% and 2-1/2% per year. She could have easily purchased a plain old annuity that would have paid her 3%. Or she could have gone to a stock broker and invested the money, and the typical mutual fund would have netted her 8% or more per year (on average) over the same time, we all know that there has been quite a run up in the market over that window of time, but the fees and restrictions of the variable annuity just ate up the returns. Oh, did I tell you that she has a 8-year surrender period that she will incur substantial penalties for taking more than $1,300 a year out, and that is much longer than the surrender period would be on a plain annuity? This paragraph is a real-life explanation as to why variable annuities are an absolutely horrible way to handle your money. If you don't mind the risk of the market going down, buy stocks and mutual funds; if you don't want the risk of the market, buy a plain old annuity. If you want something in between, split your money up. But never never never try to mix the two in the same pot; it just turns ugly.
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In order to purchase a variable annuity you must deal with a registered representative who holds a variable annuity license in your state. This agent receives additional supervision for your safety. This agent will provide you with a prospectus for any fund available in the variable annuity
The primary feature or a variable annuity is that the contract is an annuity. An annuity can provide an income that you cannot outlive. This feature can be different in various variable annuities but the fact that a lifetime income is available is extremely important.
Another feature that would make a variable annuity attractive is that there isn’t any taxation on gain during the accumulation period of the annuity. The gain is reinvested inside the annuity and this compounding effect is very important.
A variable annuity unlike other annuities is not based upon interest, rather it is based upon the performance of underlying investment accounts which you may tailor to suit your specific needs and interests. You are normally granted the right to transfer between investment options without triggering income taxes. Many of these transfers also avoid any fees. There are risks associated with investing in a variable annuity, including loss of principal.
A variable annuity is flexible. It can be changed throughout the accumulation period to meet your specific requirements. You risk tolerance can change over time. The variable annuity will allow you to change the mix of investments held by the variable annuity. If you become apprehensive about the market, there is almost always a fixed account to provide steady interest without fear of loss.
There are fees associated with a variable annuity that are not always found in other annuities. These fees reflect the fact that the value of the annuity is invested, rather than merely earning interest. There are opportunities in most variable annuities to shift from fund to fund and to shift from variable funds to fixed funds. Normally there aren’t any fees for this service.
Like most annuities surrender fees may be applicable. This is because of the long term nature of the contract and can be understood when compared to the early withdrawal penalties that are a part of certificates of deposit. These surrender fees are often waived in the event of disability.
Like other annuities the variable annuity allows you to select a beneficiary. Many variable annuities provide for a guaranteed minimum death benefit that provides some safeguards for your family should you retire before you retire. The death benefit from the annuity would pass by contract to the beneficiary in the event of death avoiding probate expense and delay. Many variable annuities will return the amount of deposits as a death benefit should the value of the annuity be less.
A variable annuity is like buying plain old mutual funds, except with higher fees and being taxed at a notably higher rate when you (or your heirs) actually try to get the money out. (There's a really lousy life insurance policy that goes with it, said life insurance being limited to making up the difference (if any) between the amount you put into the account and the actual value of the account on the day you die, if that actual value is less than the amount you put in. But here's the kicker, over time, mutual funds rarely end up being worth less than the initial deposit you made, so the life insurance benefit is fairly pathetic; I didn't say mutual funds always turn out to have great returns, just that very few people actually end up with less than they put in.)
If you want an annuity, buy a plain old annuity. A plain old annuity doesn't sing or dance, but it will provide a better return than a CD at the bank. If you want to invest in stocks and mutual funds, then go buy some stocks and mutual funds. If you want both, split your money up, and put half in one spot, and half in the other. But trying to marry the two (which is what a variable annuity is attempting to do) will produce the ugliest offspring you ever did see.
So you ask, why do people buy variable annuities? Because there are salesmen out there who recognize that a certain subset of consumers like the imagery of playing the stock market and the safety of an annuity all rolled into one. It's sort of like wanting the fuel efficiency of a Prius and the performance of an Indy car -- most consumers would be smart enough to know they can't have both in the same car, but those same consumers don't grasp that the same holds true for investments. You can have a car that seats 5 and gets 40 miles per gallon, OR, you can have a car that seats 1 and will go zero-to-sixty in 3.2 seconds, but you can't get that in a single car.
Here's an actual example of the ugly that is a variable annuity: Woman rolls over her 401k plan to a variable annuity IRA account recommended by a slick saleslady (after all, women can trust each other, right?). The amount was $24,200, and it was done in fall of 2012. She has withdrawn $5,450 over the 3-1/2 years since the rollover occurred. She now has $20,150 in the account. Real rate of return is between 2% and 2-1/2% per year. She could have easily purchased a plain old annuity that would have paid her 3%. Or she could have gone to a stock broker and invested the money, and the typical mutual fund would have netted her 8% or more per year (on average) over the same time, we all know that there has been quite a run up in the market over that window of time, but the fees and restrictions of the variable annuity just ate up the returns. Oh, did I tell you that she has a 8-year surrender period that she will incur substantial penalties for taking more than $1,300 a year out, and that is much longer than the surrender period would be on a plain annuity? This paragraph is a real-life explanation as to why variable annuities are an absolutely horrible way to handle your money. If you don't mind the risk of the market going down, buy stocks and mutual funds; if you don't want the risk of the market, buy a plain old annuity. If you want something in between, split your money up. But never never never try to mix the two in the same pot; it just turns ugly.