How to Understand and Purchase a Variable Annuity

A variable annuity can be for retirement or retirement planning.

Unlike fixed annuities, variable annuities offer additional options for investing. These additional options have greater risks than fixed annuities, so it is vital to understand the difference before investing. Otherwise you could miss out on the benefits of having a variable annuity, or you could lose on your investment. Taxes are not applied on the income until it is time to be withdrawn, and the value of your variable annuity is dependent on the performance of your investment. Once you understand what a variable annuity is, you can take the appropriate steps to invest.

Instructions

1. Learn your options. Money markets, stocks and bonds are sometimes called subaccounts and are available for you to invest in. You are usually able to choose from a list which ones you want to invest in.

2. Choose between a deferred variable annuity or an immediate variable annuity. Just as it sounds, a deferred variable annuity gives the account the chance to grow over time, and at the point of cash-out, you can choose between a lump-sum payment and annuitized payments. This option is ideal if you are planning for retirement.

   Immediate variable annuities begin paying the investor as soon as he purchases them. They are for those who are at retirement age and want regular, guaranteed income.

3. Understand the taxes, penalties and fees that are associated with a variable annuity. Withdrawals are subject to income tax if they are made after you have reached the age of 59.5 years.

   If you make a withdrawal before 59.5, you will be penalized 10 percent and have to pay taxes. Well-known fees associated with variable annuities include insurance fees as well as expenses. Many also pay a commission to the insurance agent from the ongoing fees.

4. Know the benefits, such as the death benefit. This is a common benefit that gives the beneficiary the money that is left in the account. If you have chosen purchase payments as a way to purchase your annuity, they will receive the purchase payments you have made less any withdrawals. For example, if you have made purchase payments that equal $200,000 and have withdrawn $20,000, your beneficiary receives $180,000 no matter how much value the annuity has lost in investments. Additional features include long-term care insurance and a guaranteed minimum-income benefit for an additional fee.

5. Finalize the purchase of your variable annuity. Once you have confirmed that you want to invest in this option, contact the insurance company and sign the paperwork.

References

• U.S. Securities and Exchange Commission: Variable Annuities: What You Should Know
• SmartMoney: What's Wrong With Variable Annuities