Should you consider Variable Annuities
You may have heard of an annuity but do you know what a variable annuity is specifically? Some annuities are variable while others are fixed. Here we take a look at the variable kind.
A variable annuity is a type of investment product. It is a contract that is signed between an individual and an insurance company under which the insurance company agrees to make periodic payments to the annuity purchaser effective immediately or effective at a pre-determined future date. A variable annuity contract can be made by either making a series of purchase payments or by making a single purchase payment. The choice is up to you.
When you choose an annuity that is variable you are left with a selection of options for investments. The value attached to your investment will vary in relation to the performance of the option that you decide upon. The investment options that go along with a variable annuity are most often money market instruments, bonds, and mutual funds that can be invested into stocks. An other option is one that is a combination of any two or three of these investment products.
What is a variable annuity? A variable annuity is a way to make income for the rest of your life. It allows you to put your money to work to pay you. These kinds of annuities are designed to be investments in a long-term sense not a short-term one. They are meant to meet the needs and goals you will have well into your future years such as retirement. They are not meant to be used for your short-term goals such as saving for a trip down south that you plan to take next year.
It is important to stop here and note that while variable annuities are often times invested in mutual funds, the two financial products are not the same. First of all, variable annuities are such that you will receive periodic payments for as long as you live (or your spouse will following your death).
Secondly, unlike mutual funds there is a death benefit connected to variable annuities. What this means is that if you pass away before the insurance provider has begun to make payments to you then whomever you deem as your beneficiary will be guaranteed to receive a particular amount of money (which most often is equal to the amount of your purchase payments).
Finally, unlike mutual funds variable annuities are tax-deferred. What this means is that you do not have to pay any taxes on the income/investment gains that come from your annuity until you decide to withdraw the money. If you transfer money within a variable annuity you also do not have to pay taxes at the time of the transfer but only once you make a withdrawal.
