What Is a Variable Annuity Fund?
Figuring out how to save enough money for retirement can be difficult. One of the biggest challenges is making sure that your money lasts your entire life so that you aren't left destitute in your old age. Variable annuities are insurance products designed and sold by life insurance companies that address this problem. They do this by investing in the stock market. The investments inside of the annuity are called variable annuity funds.
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Identification
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Variable annuities use special funds to invest in the stock market. Some variable annuities also invest in the bond market. These funds, regardless of what they invest in, are called mutual funds. Mutual funds are a collection of stocks or bonds with a common investment objective.
Significance
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The significance of an annuity fund is that you can invest in the stock market without having to worry about picking individual stocks or bonds. The funds in the annuity automatically diversify you. Because a mutual fund contains a collection of stocks, your money is never invested in a single company, thus reducing your risk of investment loss if any one, or even a handful, of the companies performs poorly.
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Benefits
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The benefit of the annuity funds in a variable annuity is that the funds make it simple and easy to invest in the stock or bond market. You don't need much experience to choose a mutual fund. Many variable annuities also contain managed portfolios which pick the funds for you depending on whether you're a "conservative," "moderately conservative," "moderate" or "aggressive" investor.
Warning
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Mutual funds in a variable annuity are subject to ordinary income tax instead of capital gains tax when you withdraw money from the account. Because of this, your investment returns after tax may be far lower than an investment in a mutual fund outside of a variable annuity. Annuity funds also charge management fees on top of variable annuity account maintenance fees.
Considerations
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While some variable annuities offer portfolio management, not all of them do. Consider that you may have to manage your own investments inside of the variable annuity to some extent. You won't have to select individual stocks, but you will have to select winning mutual funds. Funds are diversified by their nature, but this doesn't guarantee that a fund will make money.
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