How to Compare Variable Annuities
A variable annuity is an insurance investment product that consumers buy to invest in mutual funds under a tax-deferred umbrella provided by the annuity. Variable annuities come in different contract periods offering different types of mutual fund subaccounts and contract features. Reviewing the different components of variable annuities help you determine whether one annuity is better suited for you compared to another.
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Instructions
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Obtain information or proposals on several annuities. You can get this information from a financial advisor, an insurance agent or online research sites such as AnnuityFYI.com or FreeAnnuityRates.com.
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Take a look at the duration of the annuity contract. This is referred to as the surrender period. If distributions are taken during the surrender period, the insurance company charges a penalty called a surrender charge. Variable annuities may be anywhere from one to 15 years so try to find one that meets your investment time frame.
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Look for distribution features that allow you to take money out during the surrender period without penalty. Some contracts have an annual 10 percent distribution that isn't penalized or the contracts make exceptions for long-term care or disability needs. Better annuities give you more access to money or waive penalties in emergency situations.
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Compare management fees between each annuity by looking for the company with the lowest fees. Management fees take a percentage of your account value out annually regardless of mutual fund performance in order to pay for management, administration and marketing costs.
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Evaluate which variable annuity offers the mutual fund mix that best meets your investment objectives and have an excellent historical record. Some variable annuities have have seven to 10 mutual fund subaccounts with others having more than 40. Remember it isn't the number of subaccounts, but the quality and past performance of the mutual funds within the annuity that count. MorningStar, YahooFinance and MSN Money are good resources for mutual fund history.
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Tips & Warnings
Annuities don't provide any guarantee on performance. Investors must examine all risk prior to investing.
Distributions taken out of the variable annuity have earnings added to annual income. Distributions prior to age 50 1/2 are assessed a 10 percent tax penalty for early distribution.
