There are two types of variable annuities. The immediate annuity is one where you will make a lump-sum deposit to an insurance company. This insurance company in turn guarantees immediate monthly payment until your death. They use your life expectancy to calculate what that monthly payment will be.
In tax-deferred variable annuities, you will have the opportunity to watch your investments grow until you decide to withdraw it. It is when you make your withdraw that you will be responsible to pay any and all taxes.
Much like a mutual fund, variable annuities are sold mostly in one package by an insurance company. Combining the characteristics of a fixed annuity with the benefit of mutual funds, investors simply pay the insurance company who in turn buys units with the investor's name.
Variable annuities are quite simply a contract between you and the insurance company. While they may be a useful place to invest money you will need to do your homework in advance. Over the past several years variable annuities have stirred up some bad press due to poor sales techniques and information not being disclosed properly. There is a lot of good that can come from such investments.
When you contribute to these funds your money can grow tax-deferred until you start to withdraw the funds just like an IRA. Most variable annuities also have subaccounts with a wide range of mutual funds to select from. Therefore you can easily change your investment direction at little or no cost. The insurance company that you deal with guarantees that you will have income for the rest of your life when you invest in variable annuities. In most states these accounts are protected from creditors and/or lawsuits.
On the downside of variable annuities, many investors shy away from putting their hard earned money in variable annuities because although there is a guarantee, it takes some time to break even on what you have paid in. You cannot take the money out until age 59.5. Therefore, if you were to invest $200,000 at age 60 it would take you nearly 22 years to get all of that money back. If you live longer than 22 years then it can be a good thing and you will profit greatly from this. On the contrary, if you were to die at age 65, the insurance company would keep the remaining balance.
Other items of concern for variable annuities are the substantial surrender charges and the annual, administrative, mortality, and expense fees that many insurance companies will charge investors. This is quite possibly the biggest area in variable annuities where many people get burned. Most insurance companies charge around 1.4% for all of these expenses but some have been known to be as high as 2.5%.
Educated investors know exactly what they are looking for in terms of keeping their money safe and not being taken for a ride. If you have your mind set on investing in variable annuities it is best to do your homework, shop around, and read the fine print of any contract before you sign it. Uneducated investors are advised to do as much research as possible and to talk with as many experts in the area of variable annuities that they can.
(Expert=Sara_Spencer)
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