Variable Annuity Basics
There are a number of annuity products available.
Here's a look at variable annuities.
An annuity is a contract between you and an insurance company. You agree to give the insurance
company a certain amount of money and the insurance company agrees to grow it or pay it back to you
in increments, or sometimes both.
Fixed vs. Variable Annuity
A fixed annuity is an annuity that grows at a fixed rate over a period of time. A variable annuity, on the
other hand, grows at a variable rate depending on the types of investment vehicles the deposits are put
The money inside your annuity grows tax-deferred meaning it isn’t taxed until you withdraw it, even if it
increases in value.
An annuity can be used as a way to save for retirement. Unlike IRAs and 401Ks, there are no annual
contribution limits with a variable annuity (or a fixed annuity). You can contribute as much money to your
variable annuity as you can afford and your contract allows.
Immediate or Deferred
Variable annuities are available as immediate or deferred annuities. With an immediate annuity, you
give a one-time, lump-sum payment and then begin receiving monthly payments sometime within the next
year. The amount of your monthly disbursement is based on current interest rates and your life
With a deferred annuity, you delay the date at which you start receiving payments. In the meantime, your
annuity continues to grow (or shrink) until you’re ready to make withdrawals. It’s best to wait until after you
turn 59 ½ to receive your annuity payments so you avoid early withdrawal penalties. Once you’re ready to
withdraw your money, you can take out a lump-sum, make periodic withdrawals until the money is gone,
or you can choose to receive regular payments over a period of time.
Contributing to a Variable Annuity
You make contributions to variable annuity during the accumulation phase. When you make your
contributions, known as purchase payments, you can specify how much of each payment goes toward
various investment options. You can also choose to allocate part of your payments toward a fixed
account, which will grow at a fixed rate every year.
You can find out information about the variable annuity’s investment options by reading the prospectus.
The prospectus is document the Securities and Exchange Commission (SEC) requires companies to
give that details all the facts about the investment.
The Payout Phase
The payout phase is the period of time when you start
receiving payments from your variable annuity. You can
choose between regular payments or a lump-sum
payment. When you choose to receive regular payments,
you also choose how long the payments will last, either
a set period of time, or an indefinite period of time.
Variable annuities come with a death benefit that pays
your beneficiary if you pass away before the annuity
starts making payments to you. Your beneficiary will
either receive all the money in your account or a
guaranteed minimum amount. You may be able to pay
an extra fee for a “stepped-up” death benefit that allows you to lock-in a guaranteed amount that your
beneficiary will receive even if the value of your account falls.
Typical Variable Annuity Fees
Variable annuities are infamous for the fees they charge. It’s important to consider the fees since they
reduce the value of your account.
Mortality and expense risk charge is around 1.25% per year and is paid to the insurance company for the
risk of taking on the annuity contract.
Administrative fees are about $25 to $30 per year and used for record-keeping and other costs of
keeping up your account.
Underlying fund expenses are based on the mutual fund you choose with your variable annuity.
You’ll pay a fee for other benefits you choose with your policy, like the stepped-up death benefit, long-
term care insurance, or guaranteed minimum income benefit.
The surrender fee is charged if you withdraw money from your annuity before the payout phase begins.
The fee varies.
It's important to weigh the extra costs associated with variable annuity products to determine if they are
right for your unique situation. In a number of cases the benefits outweigh the additional costs, but not for
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