Basic information on Variable Annuities
A variable annuity is simply a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, which begin either immediately or at a future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.
A variable annuity will offer a range of investment options. Like a variable annuity owner, the value of your investment varies depending on the performance of the investment options you have chosen. The investment options for a variable annuity are usually mutual funds that are invested in stocks, bonds, money market instruments, or a combination of all three.
Although variable annuities are invested in mutual funds, variable annuities differ from mutual funds in several important ways:
Variable annuities allow you to receive periodic payments for the rest of your life (or the life of your spouse or other persons you designate). This feature offers protection against the possibility that, after you retire, you will outlive your assets.
Variable annuities have a death benefit. Should you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount, usually the number of your purchase payments. Your beneficiary will receive a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount.
Variable annuities are tax-deferred. This means you pay no taxes on income and investment gains from your annuity until you start withdrawing your money. You may also transfer your money from one investment option to another within a variable annuity without having to pay tax at the time of the transfer. When withdrawing your money out of a variable annuity, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. Generally, the benefits of tax deferral exceed the costs of a variable annuity only if you retain it as a long-term investment to meet retirement and other long-range goals.