Variable annuities are a financial product issued by insurance companies. The represent a contract between the individual and the insurance company where the insurance company agrees to make payments to the individual at a set time. These payments can either begin immediately or at a date in the future. Individuals have a choice of either purchasing a contract with a single payment or paying by installments.
Variable annuities offer a range of investment options, most often in the form of mutual funds that invest in stocks and bonds and other financial investments including real estate. The performance of a variable annuity depends on the performance of the investment portfolio that is chosen.
Variable annuities differ from mutual funds in a few important ways. A variable annuity allows the individual to receive payments over specific time periods for the rest of the individual’s life and the life of their beneficiary should they die. This feature guarantees an income should the individual retire and outlive their assets.
Variable annuities have a death benefit unlike many mutual funds. If the individual dies before payments start to be made, the beneficiary named on the contract receives specific payments. These payments are usually the amount of the payments used to purchase the variable annuity contract. A beneficiary can greatly benefit from this type of annuity especially if at the time of death the amount of the contract and the value of the account is less than amount that is guaranteed by the contract.
Another important and attractive feature of variable annuities is that they are a tax deferred financial instrument. Individuals do not pay taxes on the income or the gains of the investment of the annuity until they start to withdraw money from the annuity. Money can be transferred from one investment vehicle to another within the annuity plan without taxes being imposed. When people start to withdraw money from variable annuities, they will pay taxes on the payments at the higher regular income tax rates as opposed to the lower capital gains tax rates. Most financial experts agree that the tax deferred benefits of this financial product far outweigh the costs as long as the variable annuity is held as a long term investment vehicle for retirement or other long term goals such as saving for a home.
Variable annuities are worth looking into as an alternative to a 401k and other retirement investment products. Their tax deferred status as well as the guaranteed payments make it an attractive offer for an individual who sees the value in having specific payments being made at a certain time period and also that their beneficiaries will benefit from the annuity in the event of their death.