How Variable and Fixed Annuities Work
An individual may purchase an annuity from an insurance company by providing them with a series of payments into the account. In return the account is able to earn tax-free growth for a period of time. In the case of a fixed account annuity, this rate may be fixed for the duration of a specified period.
Variable annuities are unique because the account value can change with fluctuations in market investments and other market conditions. This type of annuity can only be invested in specific investment types such as fixed investments or common stock.
Starting at the date of the distribution, if the investor chose the life annuity options, they may be able to take distributions for the remainder of their life.
Payments depend on the amount of money contributed to the account, the length of time the funds are left in it and the rate of return earned on the funds. In addition, a factor in determining the size of the payments is whether the retiree includes a spouse and other heirs as beneficiaries.
Different policy options may enable you to have payments continue to your spouse, or to your children, or for a minimum number of years, regardless of who receives them after you die. Sometimes these options may impose higher fees to be assessed to the investment.
Interested individuals should carefully examine the variable annuity’s prospectus to learn about any special account stipulations, rules, charges, or expenses that you may not be expecting. This information is provided before you commit to the contract, so you should spend sufficient time understanding all of the details that are unclear to you.
Because the earned income is not taxed until you begin withdrawing the money (presumably at a much lower tax rate), your funds accumulate much faster than they would if they were taxed.
The part of the annuity that is makes it an insurance product is partly due to the guaranteed monthly income payments for the duration of your life (or specified period). This can significantly lower the stress of allocating retirement income. Additionally, if you should happen to die before the contract expires; your heirs may be able to receive the remainder of the account up to the value of the premiums paid in.
Withdrawals or loans will reduce the value of the contract as well as reduce the death benefit. There may be additional costs associated with options or features of a variable annuity that are not typically associated with other investments. Please check the prospectus for details on costs and conditions. The prospectus can be obtained from the financial representative offering the product.
The world of fixed rate annuities can be rather complicated. To get more details on this type of investment, be sure to visit Luke Murray at The Fixed Annuity Guide.