Variable annuity why

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Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. A variable annuity is a type of annuity contract , the value of which can vary based on the performance of an underlying portfolio of sub accounts. Sub accounts and mutual funds are conceptually identical, but sub accounts don't have ticker symbols that investors can easily type into a fund tracker for research purposes.

Among annuities , variable annuities differ from fixed annuities , which provide a specific and guaranteed return. The most popular type of variable annuity is a deferred annuity.

Often used for retirement planning purposes, it is meant to provide a regular monthly, quarterly, annual income stream, starting at some point in the future. There are also immediate annuities , which begin paying income right away. In the case of deferred annuities, this is often referred to as the accumulation phase. The second phase is triggered when the annuity owner asks the insurer to start the flow of income, often referred to as the payout phase.

Most annuities will not allow you to withdraw additional funds from the account once the payout phase has begun. Variable annuities should be considered long-term investments, due to the limitations on withdrawals.

Typically, they allow one withdrawal each year during the accumulation phase. Variable annuities were introduced in the s as an alternative to fixed annuities, which offer a guaranteed—but often low—payout during the annuitization phase.

The exception is the fixed income annuity, which has a moderate to high payout that rises as the annuitant ages. Variable annuities gave buyers a chance to benefit from rising markets by investing in a menu of mutual funds offered by the insurer. The upside was the possibility of higher returns during the accumulation phase and a larger income during the payout phase.

The downside was that the buyer was exposed to market risk , which could result in losses. With a fixed annuity, by contrast, the insurance company assumes the risk of delivering whatever return it has promised. Planning For Retirement. Life Expectancy Calculator. Health Care Costs. Retirement Lifestyle. Retirement Risks. Estate Planning. About Us View Subpages. About Us. Editorial Guidelines. Our Partners.

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Financially Reviewed By : Marguerita M. This page features 8 Cited Research Articles. Fact Checked. You may be able to transfer your money among subaccounts. However, the annuity provider may charge a transfer fee. Source: U. Securities and Exchange Commission. Christopher Magnussen What are the benefits of a variable annuity?

Chris Magnussen, Licensed Agent at Annuity. Pros Possible Inflation hedge — If your investment portfolio performs well, you have the potential to see an increase in your payments, enabling you to better keep up with inflation. Initial investment protection — Usually the annuity company will guarantee you will have access to the money you invested, even if you make no interest if your portfolio does poorly. Death benefit — If you die before you start receiving payments, your beneficiary will receive a payout from the annuity company.

Payments for life — You have the option of receiving payments for the rest of your life, even if your portfolio performs poorly and you exhaust your principal investment.

You may have to pay extra for this option. Cons No guaranteed return — Unlike fixed and indexed annuities , there is no guarantee that you will earn interest on your investment. If your investment portfolio performs poorly, it will affect the value of your annuity. Taxed as income — When you withdraw your money, the earnings are taxed as income, not at the more favorable capital-gains rate.

Complexity — Because they can be complicated, some investors may become confused about the provisions of variable annuities. This has led to what regulators say are questionable sales practices making variable annuities a leading source of investor complaints to the FINRA. Surrender charge — If you take some or all of your money out of your annuity earlier than the contract allows, you will have to pay a surrender or withdrawal charge.

This charge can be as high as 10 percent early in the contract. Some annuities allow you to withdraw small amounts — typically 10 percent or less — annually. Mortality and expense risk charge — This is the charge to cover guaranteed death benefits, guaranteed income for life or guaranteed caps on administrative charges. When you start receiving payments, you pay income taxes at your marginal rate. Variable annuities are notable because they let you make unlimited annual contributions to a tax-advantaged account, whereas IRAs and k s have strict annual contribution limits.

Most variable annuities offer an array of subaccounts, which work like mutual funds and offer a mix of component investments. You might turn to a variable annuity to lock in even more tax-advantaged investment growth. Variable annuities allow investors to accelerate the growth of their holdings via the stock market gains during the accumulation phase, potentially increasing their future income payments during the payout phase. Variable annuities allow investors to stretch their accumulated earnings to last a lifetime.

Annual fees for variable annuities average 2. Additional riders can make fees even higher. This means money invested in comparable accounts outside of an annuity might offer drastically better returns. If you need to tap into your annuity funds early, you might face hefty penalties, called surrender fees. A fixed annuity guarantees an investor a fixed return on their investment. Considered a lower risk product than variable annuities, fixed annuities help investors protect their capital and receive income payments from their retirement savings while avoiding the rollercoaster of the stock market.

Unlike a variable annuity, where your rate of return depends on market performance, fixed annuities offer a fixed rate of return for the duration of the contract. Insurance companies pay these returns from the proceeds of their internal investment portfolios, which usually invest in low-risk investments like government securities and corporate bonds.

Because they contain fewer moving parts, fixed annuity contracts are often easier for investors to understand and avoid potential surprises after purchase. Because you know the exact payout amounts you will receive over the life of the contract, you can budget for your retirement with greater accuracy. Cost of living COLA riders are available, but the additional fees may wipe out any gains.