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.