Variable Annuities

A variable annuity has a variable rate of return attached to it. In other words, some years can be very beneficial to your annuity, while in other years, you might actually lose money. Much like mutual funds, a variable annuity is connected to various assets within the stock market. But unlike a mutual fund, an annuity is a retirement account, and thus has many more tax advantages than an annuity. If you are looking to grow your money over the long run in order to be better prepared for your retirement years, a variable annuity will more than likely meet your needs.

Variable annuities require a different type of sales license than fixed annuities, so you might have to deal with an investment firm rather than a life insurance specialist. While they are still technically life insurance policies, they are also variable accounts, so only a sales professional with the proper credentials will need to sell you your policy.

Who benefits?
People who are looking for an investment that will keep up with inflation benefit the most with this type of annuity. This usually equals younger professional folk since they will be contributing a little bit of each paycheck into their policy. The dollar cost averaging method of investing will make a variable annuity much more valuable to a policyholder because this will smooth out the ups and downs of the market over time. This type of investing is also pretty easy: you just keep your contributions steady and timely. By investing a little bit each month regardless of market conditions, you will invest money in good markets and bad, thus making your money average out to the cost of inflation over a long enough timeframe.

Variable annuities have added costs to them that fixed annuities do not. Some might even be as high as 1 or 2 percent of your total investment. Because these policies don’t just grow money without any risk, a fund manager must oversee how funds are appropriated, and as a result of this, there are commission and maintenance costs that must be paid. In addition to this, there is always the risk that your investment will shrink because of a falling in price of the attached financial assets. If you have a variable annuity that is attached to developing countries, and this asset falls in value, your annuity will also lose value. Over the long run, variable annuities almost mirror inflation, but the short term variations can be much different and can lose money. This makes variable annuities more of a long term investment than their fixed brethren.

Is a Variable Annuity for me?
Variable annuities are typically funded a little bit at a time over a long period of time. If you are still working and you already have an IRA or a Roth IRA retirement account, getting a variable annuity in order to help maximize your savings can be a great addition to your portfolio. Variable annuities are not risk-free, but you can usually dictate into what type of subaccounts you want your money divided up within, thus giving you a bit more control and protection over your investment. If you are adverse to risk, you can always invest in safer bonds and blue chip stocks. If you do not mind risking a bit, you can sometimes see greater rewards by investing in riskier assets.

Other things to consider
Public school teachers’ retirement accounts are variable annuities. Defined by section 403(b) of the Internal Revenue Code, teachers and other education professionals contribute a little bit of each paycheck into such an account. Similar to a 401(k) fund, 403(b)s are still considered to be an insurance product even though they are more closely related to a retirement account.

You will also want to check out the fee schedule. With front-loading, or A-share fees, the fee will take money off right from the beginning of the investment’s life. If you put in $100,000 and there is a 2 percent fee, only $98,000 will begin earning interest. You will want to avoid this type of fee. Instead, look at B-share fees that only penalize you for early withdrawals and allow more of your money to work for you.

Final Thoughts
Buying a variable annuity is a good long term investment for most people. They typically have lower fees associated with them than mutual funds do. And because these two products are so closely related in other aspects, it’s a surprise that variable annuities don’t get more policyholders. Variable annuities also grow tax deferred, giving them yet another advantage over mutual funds.