About Variable Annuities
Many insurance companies today sell variable annuities as a product that can help you guarantee your income during retirement. While the appeal of a monthly payment during retirement can be strong, the way that the variable annuity provides it can be problematic. Before choosing to invest in a variable annuity, it is important to know exactly what you are buying.
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How They Work
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The variable annuity is a type of investment that you can buy with a lump sum or with regular payments to the insurance company over several years. Once the annuity is purchased, you can choose to start receiving payments immediately or at a future date. After the payments begin, you can receive them for a certain number of years or until you and your spouse pass away. The size of your payments depend on how much money you have invested and how well the investments in your annuity have performed.
Investments
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With the variable annuity, you get to choose between several different types of funds for your money to go into. By comparison, other types of annuities only pay you a fixed amount of interest over the life of your investment. With a variable annuity, you are in charge of where your money goes which gives you the responsibility of choosing the right investments. Since the investments are held in the annuity, the earnings that they bring in are allowed to grow on a tax-deferred basis.
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Death Benefit
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The variable annuity also provides investors with a death benefit. This means that even if you die before the payments can begin, the insurance company will make a payment to your beneficiary. The payment will at least be equal to the amount of money that you have already put into the annuity and could be more. If you die after the payments begin, your beneficiary can receive payments for certain amount time, depending on the terms of the annuity contract.
Costs
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One of the potential drawbacks of investing in a variable annuity is that it comes with a large amount of fees. The fees are usually more than what you would have to pay through the expense ratio of a regular mutual fund. On top of these fees, you also have to pay another fee for the death benefit that comes with your annuity. If you decide to get out of the annuity within a certain number of years, you also have to pay surrender fees.
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