Jan 11, 2024 By Susan Kelly
The plethora of goods and services available in therein financial sector today is large enough to bewilder even professionals, and few items have caused as much debate in both public and professional arenas as variable annuities. Many brokers and planners consider them important retirement planning tools, whereas other financial professionals caution clients to avoid them at all costs. There is no clear-cut solution to this problem, but before making a choice, you should be aware of the benefits of these investments.
A variable annuity is a deal you make with an annuity provider, which is generally an insurance company, to get a steady stream of income for life or for a certain amount of time. When you acquire a variable annuity, the amount you pay is assigned to an investment portfolio. You will have various alternatives for investing the monies in your portfolio. These alternatives, or subaccounts, may include equities, bonds, money market funds, steady income value mutual funds, as well as other assets. The amount of income you get will grow or decrease, depending on the success of the portfolio.
You may put some of your money in a fixed account, which generates a predetermined rate of interest and isn't related to the stock market. Usually, the annuity provider promises the return of premium (ROP), which indicates that you won't lose your original investment. If, however, your portfolio does not perform well, it is possible that you will not see any increase. However, if your portfolio does well, you stand to make much more money. A fixed annuity, in contrast, has an interest rate that is guaranteed regardless of how the underlying assets perform.
In terms of the range of advantages they may provide, variable annuities are now unparalleled among investment vehicles. These are some of their best-selling features:
Money may be put into a variable annuity indefinitely, as was previously noted. This is why they are so popular among the rich who are seeking tax havens.
In order to reduce the likelihood of incurring a loss on an investment, diversification is universally acknowledged as a crucial tactic. Most variable annuities provide investors with access to a broad selection of investment opportunities across a number of market sectors, investment techniques, and asset classes. If you invest your money in many things, you may spread out your risk and protect yourself against market declines. There are no fees incurred while switching between investment choices in a variable annuity.
These days, a death benefit is included in most annuities as a matter of course, so you may leave something to your family. If the annuity owner passes away, his or her beneficiaries will get either the amount the owner put into the annuity, less any withdrawals, or the value of the annuity's account as of the date of the owner's death, whichever is larger. In most cases, the death benefit is included in the variable annuity at no additional expense. For a higher premium, you may get death benefits with certain annuities.
The majority of variable contracts sold on the market today come with a variety of living benefit riders, including death benefit riders that either promise a certain minimum account value or a guaranteed stream of income. Living benefit riders provide a guaranteed income depending on subaccount development. Even if your individual accounts don't increase at that pace, you'll still receive that payment. The usual death benefit rider offers the biggest of three factors: the present contract value, its peak value on the contract anniversary, or even a value based on a certain hypothetical growth rate.
There are a number of variable annuity contracts that offer an instant bonus on funds that are deposited into the contract. Alternatively, they may offer a dollar-cost averaging program that pays a high fixed rate upon this initial balance before transferring the funds over the course of a predetermined time period, such as six or twelve months, into the sub-accounts of your choice. In either case, the bonus is paid out immediately.
The advantages provided by variable annuities would be difficult to get with any other single investment or set of accounts. However, you need to be properly informed about their downsides. Only after considering your own tax status, investment and retirement goals, and time horizon can you determine the true value of these products.