Talkin Cash With Walt: Variable Annuities
What
Is a Variable Annuity?
A variable annuity is a contract between
you and an insurance company under which the insurer agrees to make periodic
payments to you beginning either immediately or at some future date. You can
purchase a variable annuity contract by making either a single purchase payment
or a series of purchase payments.
A variable annuity offers a range of
investment options. The value of your investments within the variable annuity
will vary depending on the performance of the investment options you choose.
The investment options for a variable annuity are typically mutual funds.
Although variable annuities are typically
invested in mutual funds, they differ from mutual funds in several important
ways:
First, variable annuities let you receive
periodic payments for the rest of your life (or the life of your spouse
or any other person you designate). This feature offers protection against the
possibility that you will outlive your retirement money or assets.
Second, variable annuities pay death
benefits. If you die before the insurer has started making payments to you,
your beneficiary is guaranteed to receive a specified amount. Your beneficiary
will get a death benefit if, at the time of your death, your account value is
less than the guaranteed amount.
Third, variable annuities are tax-deferred.
That means you pay no taxes on the income and investment gains from your
annuity until you withdraw your money. You may also transfer your money from
one investment option to another within a variable annuity without paying taxes
at the time of the transfer. When you take your money out of a variable
annuity, however, you will be taxed on the earnings.
How
do Variable Annuities Work?
A variable annuity has two phases: an accumulation
phase and a payout phase. During the accumulation phase, you
make purchase payments, which are allocated to a number of investment options.
For example, you could designate 40% of your payments to bond mutual funds, 40%
to a U.S. stock mutual fund, and 20% to an international stock fund. The money
you have allocated to each mutual fund increases or decreases depending on the
fund's performance.
Withdrawing money from your account
during the early years of the accumulation phase will cause "surrender
charges." In addition, you may
have to pay a 10% federal tax penalty if you withdraw money before the age of
59½.
At the beginning of the payout phase,
you may receive your purchase payments plus investment income and gains as a
lump-sum payment or you may choose to receive them as a stream of payments at
regular intervals. (Generally monthly
If you choose to receive a stream of
payments, you may have a number of choices of how long the payments will last.
Under most annuity contracts, you can choose to have your annuity payments last
for a period that you set (such as 20 years) or for an indefinite period (such
as your lifetime or the lifetime of you and your spouse or other beneficiary).
During the payout phase, your annuity contract may permit you to choose between
receiving payments that are fixed in amount or payments that vary based on the
performance of mutual fund investment options.
You will pay charges when you invest in
variable annuities. Be sure you understand all the charges before you invest. These
charges will reduce the value of your account and the return on your
investment.
l Surrender charges – If you
withdraw money from a variable annuity within a certain period after a purchase
payment (typically within six to eight years, but sometimes as long as ten
years), charges will accrue.
l Administrative fees – The
insurer may deduct charges to cover record-keeping and other administrative
expenses.
l Underlying Fund Expenses – You will
also pay indirectly the fees and expenses imposed by the mutual funds that are
the underlying investment options for your variable annuity.
Remember: Before purchasing a variable annuity, learn as much as possible about how it works, the benefits it provides, and the charges you will pay. n