Variable Annuities Explained, How Variable Annuities Work

Variable Annuities

Variable annuities are contracts between an insurance company and an individual. We’ll say “you” is the individual. In the terms of this contract the insurer agrees to make periodic payments to you. These payments will begin either immediately or at some time in the future depending on what you chose. You can purchase a variable annuity by making either a single lump sum payment or a series of deposits or purchase payments known as premiums. Quite literally these choices are up to you.

Moving on, variable annuities usually offer a range of investment options. The value of a variable annuity can vary greatly depending on the performance of the investment options you chose. Typically there are three investment options available for these types of products. You will find these three options usually consist of mutual funds that invest in stocks, bonds, money market instruments, or any combination of the three.

Even though a variable annuity is typically invested in mutual funds, variable annuities differ from mutual funds in three distinct ways:

  1. Variable annuities are set-up so you receive periodic payments for the rest of your life. And fear not, your beneficiaries life too in the case of your death. This can also be used as a tool that helps you protect against the possibility of outliving your retirement.

  2. A variable annuity provides a death benefit. This means if you die before the payments have started, your beneficiary will receive a specified amount generally speaking this is at least the amount of your premiums. This works out particularly well for your beneficiary if, at the time of your passing, the account value of your variable annuity is less than the guaranteed amount.

  3. And last but not least, and certainly important, variable annuities grow tax-deferred. This simply means you do not pay taxes on the income or investment gains from the contract until you start withdrawing money. You also have the option of transferring the money from one investment option to another without being taxed. Keep in mind when you start withdrawing your money from a variable annuity you are taxed on the earnings at ordinary income tax rates rather than lower capital gains rates.

In summation, the benefits of tax deferred growth in a variable annuity outweigh the costs if you intend to keep it as a long-term investment, ten to fifteen years at least, to meet your retirement and any other long-range goals you might have like college funds.

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This entry was posted on Saturday, July 23rd, 2011 at and is filed under The Different Types of Annuities. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

2 Responses to “Variable Annuities Explained, How Variable Annuities Work”

  1. Nevada Annuities » Blog Archive Annuities Pros And Cons, Pros and Cons of Annuities - Nevada Annuities Says:
    December 8th, 2011 at

    [...] Variable annuities are a form of security that provides the owner the opportunity to invest in various core investments. With a variable annuity you accept all the risk. If the core investment(s) go up, your gain may be substantial. On the other hand, if the core investment(s) go down, your loss can also be substantial. [...]

  2. Nevada Annuities » Blog Archive » Annuities Explained, an Explanation of Annuities » Nevada Annuities Says:
    December 8th, 2011 at

    [...] industry started with two types of annuities, fixed annuities and variable annuities, then added an index annuity. The nice thing about all three types, as far as annuities explained, [...]

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