Financial security, especially in the years after retirement, is one of the things that most individuals crave for and a variable annuity is one of the ways to achieve this. This is a type of contract in which the individual and the insurance company come to an agreement in which intermittent payments are made to the individual by the insurer. The purchase is made either by purchasing a lump-sum payment or smaller individual payments.
There are various investment choices at the disposal of the individual and the performance of these investments is what will determine the value of their variable annuity.
A variable annuity is different from other investment options. With it, the purchaser is able to receive payments periodically for the days that they have left off for their beneficiaries’ remaining days. There is therefore security as the purchaser will never outlive their assets.
There is also a death benefit in that if you do pass away before you receive any payments from your variable annuity, the designated beneficiary will get a certain amount that should be equal to the amount you paid when you bought the variable annuity.
Tax on a variable annuity is postponed. This means that no taxes are charged on any income accrued by the investment before you withdraw the money. Money may be moved between different payment options without a single cent being charged for the transfer. However, when you start withdrawing cash from the variable annuity, regular income tax on your earnings will be charged on the payment instead of the capital gains rate which is actually lower. Therefore, if your variable annuity exists in the long term and is supposed to serve you after you have retired or to help deal with other goals in the long term, the variable annuity will serve you better. If this is not the case, you might end up losing in the long term due to the tax charged when you start withdrawing.
There is a lot of risk involved when purchasing a variable annuity and it is not advisable to settle on this type of investment unless you intend to use it to achieve long term objectives such as ensuring that you have a steady income after retirement.
All the details about a variable annuity are usually contained in a prospectus which is provided to the potential buyer by the insurance company. It is advisable for the individual to read carefully through the terms and conditions in the prospectus as well as any payments that are to be made and all the options available for the purchaser to invest in. The terms of the death benefit should also be considered, as well as all the options of how you as the individual will be able to receive the payments and any interest earned.
A variable annuity is a very good investment vehicle especially for someone who would like to receive money for a long time, that is, until they pass away. It does carry some risks, but that is usually the case with any type of investment.