How Does a Variable Annuity Policy Work?
Annuities are insurance policies that allow you to save money for your future retirement. Annuities are often used as the basis for pension plans. There are two basic types of annuities. The first is a fixed annuity. This annuity pays a fixed rate of return on your savings and is relatively simple to understand. A variable annuity offers you more complexity and higher potential returns.
Other People Are Reading
-
Premiums
-
The savings you deposit into the variable annuity is called a premium. Some variable annuities accept multiple premiums over time. These annuities are called "savings annuities." Others only allow one premium payment. These are called "single premium annuities." The annuity's premium may then be invested into the annuity's sub-accounts.
Investment Component
-
A variable annuity is comprised of sub-accounts. These sub-accounts are mutual funds. A mutual fund is a collection of stocks, and sometimes bonds, that share a common investment objective. The overall performance of the mutual funds determine what the variable annuity's account value is. If the mutual funds perform poorly, then the annuity's account value will suffer. If the mutual funds perform well, then you may end up earning more than you would have if you had invested in a fixed annuity.
-
Death Benefit
-
The death benefit is normally equal to the annuity account value. When you die, your beneficiaries receive the annuity's account value. However, some variable annuities offer a "step up" basis at death. This means that the insurer gives your beneficiaries the highest total value of the annuity across all the years you owned the policy regardless of the current account value.
Fees
-
Variable annuities come with fees. These fees include policy fees for maintenance and other administrative costs. They also include mutual fund management fees for paying fund managers to invest your savings. On top of this, fees called "12-b1" fees are charged to pay for commissions to the insurance agent, as well as marketing of the mutual funds.
-
