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Variable Annuity And Its Types

Variable Annuity is an investment option that can secure your future retirement if the tides turn out good for you as you invest in it. Several insurance companies in the US offer this kind of annuity together with some other types.  You’ll always benefit from them if you care to know some details involved.

Basically, Variable Annuity is of two major types namely Deferred Variable Annuity and Immediate Variable Annuity.  Let’s examine them differently.

Deferred Variable Annuity

This is the commonest type of Variable Annuity most people usually go for. It allows your investment to accumulate and yield compound interest over a period of years. In most cases, this type is tax deferred. You’ll only pay tax when you want to make your cash withdrawal at a future date.

In some cases, deferred variable annuity can be converted into income annuity when the contract owner retires.  In such situation, your payments are distributed on monthly basis for a period of time you choose. You also have the option of cashing out all your money at once if you want that.

The accumulated nature of deferred variable annuity makes it more profitable. You can easily start off with a small initial premium and then allow it to grow over time. If the economic market turns out in your favor, your small investment will turn out to be very big later on. You’ll also enjoy the deferred tax benefit that comes with this kind of investment. The longer you extend your withdrawal date, the greater the tax benefit becomes.

Immediate Variable Annuity

This option allows you to receive payment monthly even immediately after the first investment is made. You’ll start receiving the dividends even in the very first month. There’s also a lifetime income guarantee on this kind of investment. You have to make a lump sum deposit in your portfolio. This will give you room to diversify your investment on various options such as bonds, stocks and mutual funds.

It’s good you know that immediate Variable Annuity is equity based. Your investment has the potentiality of decreasing in value based on the performance of the economic market. It can as well increase if the market is doing well. In any case, you’ll always enjoy instant monthly payment if the investment is doing fine.

Having known about the two kinds of Variable Annuity, you don’t need to jump into conclusion by choosing any of them as you desire. There’s the need to make proper inquiries before taking any step. You need to know the kind of insurance company you’re dealing with. You also need to know about the available offers the company is having. This will help you make the right decision. It’s also very necessary to engage the services of a good financial adviser to help you in making the right decisions. Through this means, you’ll always gain a lot when you decide to invest in any kind of annuity. You’ll always secure your future retirement period in the process.

Variable Annuity And Its Two Phases

As a unique kind of annuity, Variable Annuity works in a very unique way. You need to be properly informed about the way it works before you actually think of choosing it as an investment option.  Never rush into such an investment without proper knowledge of how it works.

Basically, Variable Annuity has two main phases. These are the accumulation phase and the payout phase.  Let’s examine them.

FindAnnuitiesThe Accumulation Phase

This is the period when you’re expected to make series of purchase payments. You have to also allocate the purchases to various investment opportunities such as bonds, stocks, and other mutual funds. The investment options give you the room to invest your money for real gain. You can decide to allocate some percentage of your purchase payment to bond fund. You may also decide to invest in the US stock fund or to international stock fund as well. You may also decide to invest only in one investment option if you wish.

The money you allocate to each of the investment options will either increase or decrease as time goes on.  This depends mainly on the performance of the fund over time.  Hence, it’s always important to invest in number of mutual funds at the same time. This will help you not to lose all your investment if anything gets awry. Chances are that some of the mutual fund investment will continue to increase while others may rise and fall at intervals. You’ll always gain if you diversify your investment.

Variable Annuity can give you the room to allocate some part of your purchase payment to a fixed account. This is different from mutual funds. The fixed account normally pays a fixed interest rate. The insurance company you work with may reset the interest rate on periodic basis but you’ll be sure of receiving a guarantee minimum.

Meanwhile, there’s always the need to source for pieces of information about investment opportunities before you invest your money. You can request for prospectuses about mutual funds in order to know more about the options before you invest.

There’s always the room to make some transfers during the accumulation phase. You can easily transfer your money from one investment option to another without paying any tax on the income and gains.  However, your insurance company may charge you some amounts for the transfer depending on the prevailing conditions. You may have to pay what’s known as surrender charges as you decide to make some transfers.

The Payout Phase

This is the period when you begin to receive your gains from the investment you’ve made. You can receive your initial purchase payments and the income/gains that have accrued from them. You may receive them as a lump sum or series of payments at regular intervals.

The payout phase gives you the room to choose when to receive payment. You may decide to receive the payment after a period of years or you can go for immediate payments which gives you room to receive payments few months after your initial investment. You can also choose lifetime payment option which gives you the room to transfer the payout to your beneficiary when you die.

It’s always good you be properly informed before making any move when it comes to Variable Annuity. Take your time to ask questions from a reliable financial adviser if you’re confused.

Variable Annuity and its Bonus Credit Feature

Variable Annuity comes with some unique features. Some insurance companies offer the investment contract with Bonus credit. They promise to add extra bonus to your contract value when you agree to make the initial purchase payment. The value of the bonus credit is usually dependent on a specified percentage of the purchase payment you make.  It can be as from 1% to 5%. Let’s take a look at a typical example.

You may decide to purchase a Variable Annuity contract that offers a bonus credit of 3%. If the contract amount is $15,000; the insurance company will give you 3% of the amount which will be $450. This will help you to have extra cash in your investment account.

Well, you have to play the game with caution.  Several Variable annuities that come with bonus credits do have their negative aspects.  In most cases, some insurance companies offering such bonus credits use that to lure clients into purchasing the annuities. At the end of the purchase, the bonus credit given to you may also be deducted through other hidden charges.

Oftentimes, a Variable annuity with bonus credits attracts higher expenses and charges. They do come with high management fees as well. The higher expenses will eventually outweigh the benefit of the bonus credit offered initially. The insurance company you’re dealing with may decide to charge you for the bonus credit offered in diverse ways. You may be asked to pay higher surrender chargers.  Sometimes, the surrender charges may even be higher that the bonus credit offered initially. It might even be higher than the offers you get in a variable annuity that has no bonus credit.

Again, your insurer may also use longer surrender periods to gain back the bonus credit offered initially.  Through this, the purchase payments you made may be subject to the surrender charges for a longer period. This may not be the case when you go for a Variable Annuity without any bonus credit.

There may also be higher mortality and expense risk charges in variable annuities with bonus credit.  The higher annual mortality and expense risk charges may be deducted without your notice. The percentage amount may be very small but with time, it’s going to build up.

From the above, it’s very clear that many variable annuities that come with bonus credit offers are likely to attract higher charges in diverse ways. This is true as many insurance companies are out for business. No single penny of theirs goes out to customers just like that. They will always find a way to recover the money.

In any case, there are may be some  reliable insurance companies that also offer bonus credit for  Variable Annuity without  using  hidden means to  recover the money back. Such insurance companies still exist but you have to take time to locate them. Before you agree to go for an annuity with bonus credit, make sure you know a lot about the company involved. Ask questions as regards the charges and the processes involved. This will save you from future problems as you go ahead to pay for the investment option.

 

Useful Tips For Investing In A Variable Annuity

A variable annuity is usually very popular because of its potential benefits and despite its perceived risks. However, there are certain tips that the investor can follow that will help them to minimize the risk as well as increase the chances of better returns on their investment.

The first tip is to purchase a variable annuity that is supposed to help you achieve a long term goal or that is supposed to provide income after retirement not for other uses such as going for a trip. It is important to consider why you are investing in a variable annuity because if you withdraw the funds before time you will be charged a fee by the insurance company.

It is important to realize that the option for withdrawing funds before the set time comes with penalties. Therefore, the second tip is to ensure that you have enough funds to support you before you retire so that you will not be forced to withdraw the funds. Apart from paying the fees for early withdrawals, you will also lose as the money that you withdraw could have continued to accumulate without paying any tax.

The third tip is to ensure that you are familiar with all the points in a variable annuity including any loopholes and pitfalls. It is important to read the prospectus carefully as it will define the charges as well as the payments that you will receive.

It is important to use the help of a professional who can be able to calculate for you any of the charges as well as potential payments as this may help you to decide on how you should invest in order to get the best returns. Professionals sometimes understand the market best. Since payment is linked to the performance of your sub-accounts, you may need to seek advice from such professionals on where exactly you should invest.

It is important to note that the investor will get what they pay for. Therefore, if they want to get good returns they should be willing to remove some cash as well. If the investor does not allocate their funds because they are afraid of the risk of losing, then they also risk losing on the chance to make money in case their investments options perform well.

It is important for you as the investor to do your part before purchasing a variable annuity from a particular insurance company. There are so many agencies which rank insurance companies according to their strength in order to determine whether they will be able to serve you in the long run. A potential investor should look for such rankings and evaluate them before deciding on the best insurance company to purchase a variable annuity from. This is the only way they will be able to guarantee a return on their investment when it is time for the payout phase.

A variable annuity can be quite profitable. If the individual follows the above tips, then they are more likely to benefit from these types of annuities.

Tips for investing in a Variable Annuity

You can actually benefit a lot from Variable Annuity if you know the right steps to take. You can as well lose your hard earned money if you invest in the plan without proper guidance. Among the various kinds of annuities meant for retirement purposes, Variable Annuity is known for its viability. You can succeed in using it to raise steady means of income when you retire.

Actually, there are some risks involved in Variable Annuity. You need to be well informed about them.  For instance, there’s a risk of having loss if your investment is decreasing on regular basis. There’s also the risk of paying several charges both the known and the unknown ones. You need to know the right steps to take in order to benefit more from the investment opportunity. The following tips can be of help to you.

•             Budget well before you invest

You need to budget your cash expenses well before you think of investing in a Variable Annuity. There’s no need to invest in the plan with the cash you’ll need in the near future.  It’s always better to use the money you won’t like to touch for years when thinking of making the investment.

•             Diversify Your Investment

To gain more from Variable Annuity, you need to diversify your investment portfolio.  You have the opportunity to invest in the US stock, international stock, bonds and mutual funds.  You need to divide your investment among the various options.  This will help you never to lose your money if one of the investment options begins to decline in the economy market.  If you invest in one option, there’s the possibility of losing everything if the market keeps decreasing.

•             Consider the charges involved

You need to make inquiries about management fees, surrender charges and other extra charges that may be involved when you go for Variable Annuity. Oftentimes the insurance company may charge a management fee of 1% to 2%. You may also be charged a 10% tax penalty on the surrender charges when you want to withdraw.  You need to know more about these charges before you make your choice.  Try and also find out if your insurer has hidden charges or not.

•             Invest in Options that interests you only

You need to check    the annuity prospectus of the insurer in order to discover various investment options that are available. When you locate them, do well to invest in the options that interest you.

•             Consider going for deferred variable annuity

Deferred variable annuity pays better since it gives you the opportunity of leaving your investment for a long period of time.  In most cases, you won’t pay any tax on your income returns until you’re set to make cash withdrawals at a future date. Deferred variable annuity also gives you the opportunity of investing with a small capital. You’ll then watch the investment grow as the years roll by.

In all, there are other details you still need to know about Variable Annuity. There’s always the need to engage the services of an insurance agent or a financial adviser to help you out.

Pros and Cons of Variable Annuities

It’s possible to maintain a steady flow of income when you retire. This can be achieved when you go for annuity for retirement. There are various insurance companies all over the US offering all kinds of annuities. Variable annuities are among the common plans available. Active workers who desire to enjoy steady income flow during retirement always like to go for such annuities.

By way of definition, a variable annuity is a kind of annuity for retirement that allows you the opportunity to choose from a selection of investments and then pays you a certain level of income when you retire from active service. The level of the income you’ll receive is determined by the actual performance of the investments you choose.  You stand to gain a lot if the investments are doing very fine.

The Pros

As a unique annuity for retirement, a variable annuity is tax-deferred. You’re not expected to pay tax from the income you’ll be gaining out of the investments you choose.

Unlike fixed annuities, variable annuities normally build up your savings by giving you the opportunity for long term capital growth. You simply invest any amount or you can invest in any stock or mutual fund portfolio and then watch the income grow. No tax is deducted from the gain accumulated until you’re ready to make withdrawals.

Again, variable annuities are not affected by inflation. This is because of the growth potentials seen in them.

The Cons

If you’re still a beginner when it comes to annuity for retirement, you may have to face some risks that are usually associated with variable annuity.  There’s always the investment risk involved. For instance, if the investment you go for begins to decline, the value of the annuity will also begin to go down. This means you’ll only gain very low income from the investment.

There’s the case of tax.  Although variable annuities are tax-deferred, you still have to pay taxes when you want to make withdrawals.  There are also surrender charges and other variable fees involved.  Management fees and other hidden charged may also apply. All these depend on the terms and conditions involved in the annuity process. The insurance company you’re dealing with also has a lot of part to play in the fees involved.

How or when to Know if Variable Annuity is right for you

Having seen the above description, you may be wondering how or when to know if variable annuity is right for you.  It all depends on certain factors.  A variable annuity as a form of annuity for retirement can actually boost your savings for your retirement period. If you’re looking ahead for a successful retirement, you can opt for this kind of annuity since the income is allowed to grow and then withdrawn on a variable date chosen.

In any case, there’s always the need to be properly guided when search for the right annuity for retirement that can suit you. There’s needed to go for proper financial advice at the hands of a good financial adviser. You also need to take your time to locate a reliable insurance that can give you the best of options. You have to compare various companies and their offers before you narrow down your choice to any of them.

Important and Unique Features Of A Variable Annuity

A variable annuity should not be confused with other types of retirement investment plans as it has unique features that set it apart from the rest and these include:

FindAnnuities1.            No limit on contributions

The premiums payable in a variable annuity are quite flexible and there is no cap on the amount of money that an individual can contribute in a year. This is different from other retirement plans such as a 401(k) in which an investor is not allowed to contribute more than the set limit. Investors who are wealthy and who would like a large amount of money paid to them after they have retired will be limited by this cap.

There is also no set amount of money that the investor can contribute at a given time, and the individual can continue adding to their retirement plan for as long as they want. The premiums they pay can vary depending on where they are financially at a given time.

2.            Tax payment is deferred during the accumulation phase

This means that the investor does not pay any tax for the amount gained while in the accumulation phase. Tax is only charged after the individual has started withdrawing funds from their variable annuity, meaning that they can postpone withdrawal for as long as they want while accumulating income in their account without ever being taxed for it. This is different from other types of investments such as a mutual fund which is usually taxed every year.

3.            Sub-accounts in a variable annuity

The accounts of a variable annuity are usually separate from those of the insurance company, and these sub-accounts usually depend on the investment option that the investor chose. The most common sub-accounts are usually those dealing in stocks – US and international, bonds – both corporate and government as well as the money market.

The individual has the option of allocating their funds to different investments within the different sub-accounts and they also have the option of transferring from one investment option to another without being taxed for it.

4.            The rate of returns varies and it is not possible to predict it

Investment in a variable annuity is tied to different options and the value or returns on these investment options are determined by market forced that are beyond the investor’s or insurance company’s control. Therefore there is the risk of losing everything, or gaining a lot with a variable annuity, and the rate of return may be different each year. An investment option may perform very well in one year and very poorly in the next. It is not possible to predict how the market will fare by the time it is time to make withdrawals which may be about ten years from the date of purchase of a variable annuity.

A variable annuity is an investment option like many others, but the above four features are what differentiate it from any other type of investment option and make it stand out. The risk factor of a variable annuity makes it different in that there is always the risk of great losses as well as the potential for great rewards.

Immediate variable annuity As a good Retirement Plan

Variable annuity is usually classified according to when the investor wants to receive returns on his or her investment. There are two major types of variable annuity, the immediate variable annuity and deferred variable annuity.

In a deferred variable annuity, the individual receives a return on their investment at a later date and this type of variable annuity is subject to compounded growth as well as tax deferral during the accumulation stage.

In an immediate variable annuity, the paycheques start coming immediately. Sometimes within a month or a year depending on the periodic payment periods agreed between the investor and the insurance company. Therefore, the investor receives dividends on this type of variable annuity immediately after it is purchased, and the individual is guaranteed to receive the income for as he or she is alive.

In an immediate variable annuity plan, the investor usually makes a lump-sum deposit which is put in a portfolio and the investor can spread these funds across different assets. The investor can choose to purchase bonds or stock and they will get payments depending on the performance of their investment in that particular year.

The investor who opts for an immediate variable annuity instead of a deferred variable annuity has to let go of the possibility of compounded growth which is enjoyed in deferred variable annuity as they start receiving the funds immediately. They also start paying income tax on their withdrawal immediately because they start withdrawing funds as soon as they purchase the variable annuity, without allowing the funds to accumulate.

Immediate variable annuity carries a lot of potential risk because it is equity based. Therefore, the returns are usually different for the investor depending on the performance of their asset class in the money markets. If their investments performed well during a particular year, their accounts are likely to be more valuable meaning that they will get higher payments. However, if their investments perform poorly during the year, their accounts will reduce in value and ultimately, the payments that they receive will be less. Because withdrawals are not deferred, there is no ‘surrender charge’ in an immediate variable annuity for early withdrawals.

In immediate variable annuity, the investor is guaranteed an income for life and there is the potential that their investment will increase and their account will have a higher value with time. There is no possibility of the individual outliving their funds and they will receive monthly or yearly payments for the rest of their life.

This type of variable annuity is best for individuals who have already retired as they can start getting their funds immediately. They are also cushioned from the risk of investing over a long period of time, as accounts can lose significantly after a long time, though they can also gain significantly after a long period of time. The retirees can start getting a paycheque immediately, though the payment rate is dependent on the performance of their investment. It is important to read the details of the prospectus offered by the insurance company in order to know all the terms that apply to this type of variable annuity.

How Variable Annuities Work In Its Payout Phase

In a variable annuity, the individual makes either a lump-sum payment or a series of individual payments to an insurance company who then invests the money and pays the individual after an agreed period of time. The payments are usually made from at once or periodically depending on the agreement made between the individual and the insurance company at the time of purchase.

From this discussion, it is clear that the variable annuity has two phases. The first phase is known as the accumulation phase in which the individual pays the money at once or at different times and the money is invested and it begins to increase or decrease depending on the performance of the investment option.

The second phase of the variable annuity is known as the payout phase. In this phase, the individual receives the returns on their investments. This usually includes the initial purchase plus any interest that may have been gained during the accumulation phase. There are generally two options in the payout phase, and the first option is for the individual to receive all the money, that is, the initial purchase payment as well as any interest accrued at once as a lump-sum payment. The second option is for the individual to receive payments periodically after an agreed period of time and for most insurance companies; these payments are usually made after every month.

In the second option, there are also two choices available for the investor. These choices determine the total amount of time that you as the investor hope to receive the payments. You and the insurance company may come to an agreement that they will pay you your money plus interest over a specific period of time. For example, 30 years or indefinitely for as long as you or your beneficiary lives.

Payments may vary depending on what you agreed in the initial contract. You as the individual may choose to receive payments in this phase as fixed amounts each time or as varying amounts which are pegged on the performance of your investment. If you invested in stock, when the stocks are doing well you will receive more money. When the stocks are performing poorly, you will definitely lose.

The payout option that you choose will determine the amount that you get in each regular payment. It is important to read the terms and conditions of each insurance company as some will not permit you to make any withdrawals from your account once you start receiving payments for your variable annuity.

The payments in the payout phase of the variable annuity are usually taxed as income by the federal government and the insurance company may also have its own charges. It is important to read the policies of the insurance company as outlined in the prospectus in order to determine all the fees charged by the insurance company before you decide to invest with them. This is because these charges will also determine how much you get in terms of payments.

A Deeper Look at the Characteristics of Fixed Annuity

The features of a fixed annuity are; bailout provision, tax deferral features, secure principle, guaranteed rate of return, option for life income and a penalty-free withdrawal permission. A fixed annuity is tax deferred meaning that you are not taxed until withdrawal and this has made them the most popular mode of investment better than the likes of CDs and bonds when planning for a retirement investment. Instead of paying a tax for 10 to 30 years, you can re-invest the same amount. Fixed annuities guarantees you with a zero potential loss of principle and their rates and tax deferrals are higher than money market accounts and the CDs. This means that the annuity removes the undesirable forms of risk for those individuals in retirement who are concerned about the return on their money and not return of their money.

FindAnnuitiesThe most important characteristic of fixed annuities is the fact that they offer a lifetime income option and they allow individuals to shift from retirement savings to guaranteed retirement living. A fixed annuity will offer you with a bail out provision. These provisions are there for purposes of protection from the wild fluctuations in rates when the guarantee period expires or lapses. This ensures that you can cash out on the penalty fees in case the insurance company drops your interest rate. With annuities, you can receive immediate payments or future payments. Most people believe that the immediate fixed annuity is the classic annuity because you will start to get periodic checks after the first month of investment. The checks can be semi-annually, quarterly or semi-monthly. This is different from the deferred annuities, which re-invests interests automatically and then pat out at the end of the term in one huge lump sum.

The following factors affect immediate fixed annuities; pay period, interest rate, length of contract and the size of the initial investment. If you need an increased monthly payment then larger investments that have shorter-term yields are for you. To receive high monthly payouts and higher interest rates, go for an Insurance company that is highly competitive. More and more Americans are going for the immediate fixed annuity because of their characteristic of guaranteeing one a lifetime income that he or she can’t outlive. In America, the social security payments are declining, there is an annual inflation of 3% rate and the advances in healthcare is outliving their retirement savings. The only remaining savior is the immediate annuities.

In summary, the characteristics of a fixed annuity may provide one with a safety of investment and may also guarantee a return. People who have limited funds and wish to invest really prefer these annuities because it is a risk free investment. The fund that is being accumulated is usually annuitized and then the annuitant is paid in fixed or guaranteed lifetime payment. Fixed annuities are generally considered a low risk savings investment as you may get a positive return rate. They give an individual a peace of mind.