Variable Annuities Definition

A variable annuity is a hybrid investment that allows a person to take advantage of the growth potential of stocks yet enjoy the guaranteed income provisions annuities offer. These instruments are very popular because they offer investors a much higher potential rate of control and more control over their money.

Even though it is a partially equity based vehicle, most of the funds placed in a variable annuity are guaranteed by an insurance company. This means that the insurance company signs a contract that obligates it to pay those funds to the annuitant. To make sure it can meet this provision the insurer will place most of the money invested in a traditional fixed rate annuity.

This means that these products are a very safe investment in which most funds invested will be repaid. There is some risk associated with such products because a percentage of the money put up is invested in stocks or other equities. The idea behind this is to provide a much higher rate of return. Any proceeds from this investment are reinvested in the plan to increase the size of the income payments.

How Variable Annuities Work

A variable policy consists of two different investments, both of which are administered by an insurance company. These are a traditional annuity and an investment portfolio. The traditional portion is used to keep the bulk of a person’s investment safe, while the portfolio is used to provide a higher rate of growth.

Instead of having to take money out of the plan, its beneficiary or owner receives a series of payments outlined by a contract with the insurance company. This guarantees that individual a specific amount of income for a specific period of time. It also provides tax benefits because funds held in such a plan are deferred.

Many people use this kind of instrument as a retirement savings vehicle because it is more secure than IRAs and mutual funds. Unlike those products it is guaranteed by the insurance company. There are also limits to the amount of tax deferred funds that can be placed in one.

Immediate Variable Annuities

An immediate annuity is a plan that starts making payments to its beneficiary as soon as it is purchased. Such vehicles often come with a variable option in order to enable their owners to take advantage of the potential growth that the stock market can offer. Many persons using these plans as sources of income will take advantage of this provision. One reason why they are so popular is that funds dispersed from an annuity are not subject to capital gains tax.

Quite a few individuals will purchase a variable immediate plan when they retire. This can reduce an individual’s potential tax burden and provide a long term source of income for his or her golden years.

Deferred Variable Annuities

The most popular variable products are the deferred annuities that are widely used as retirement planning tools. The difference between a deferred and an immediate product is that the deferred vehicle is purchased with a series of payments over a number of years.

When a plan is deferred it has two phases: accumulation in which wealth builds up and payout when money is dispersed. In a variable annuity the equity investments are used to augment the regular payments made into the plan.

Individuals can choose to have all or part of their retirement savings placed in a variable annuity. In some cases it is possible to have the payments from an employer’s retirement plan placed in one of these vehicles. Individuals who do this will enjoy the same tax benefits as those with other retirement plans. They will also face the same penalties for taking funds out early.

A big reason why many people use these vehicles for retirement planning is that there is no limit on the amount of money that can be placed in them. This can enable persons to save more tax deferred income than allowed by plans such as IRAs. If you decide to go with a fixed annuity instead of a variable annuity, be sure to lock in those fixed annuity rates before they rise.

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