The Basics of Variable Annuities

Variable annuity is one of the many types of annuities offered by insurance and investment companies. In a nutshell, a variable annuity is a contract that requires the annuitant to make an investment, either in full or in multiple partial payments. What a variable annuity provides to annuitants are periodic payouts. The payouts can begin at the time the annuity contract is bought, or at a later date to be specified in the annuity contract. Most annuitants also use the payments they receive to begin other investment funds. How these investments turn out will be the basis of the total value of your variable annuity contract.

What are the benefits that can be gained through variable annuities? Well, first and most importantly of all, whatever earnings your variable annuity contract accumulates will be tax-deferred. Thus, this is a good way to invest your money without dealing with tax burdens. The earnings will be completely yours. However, aside from that, a variable annuity can also be highly beneficial, in that it can be arranged to also provide death benefits, much like a life insurance policy. If not, you can also choose to receive the periodic payments earlier.

A variable annuity contract goes through two phases. The first is the accumulation phase. This refers to the period over which the periodic payments are made by the annuitant to complete his/her investment into the contract. You can divide the money that you put in into different investment funds so that the performance of your overall investment will vary and be more flexible. You can also move your money around and transfer from one fund to another, but at a certain fee. Aside from investing into different types of funds such as bond funds, stock funds, and the likes, you can also allocate a specific amount as a fixed investment, which means that it will provide you with a fixed amount as interest. The interest will depend on a rate specified by the insurance company or annuity provider you signed with.

The second phase is the payout phase, the period during which you will begin to receive the earnings from your investments. You can choose whether to withdraw the money in full, or receive them in a regular schedule. By choosing the second option, you can stretch the amount out over a longer period to make it last until a specific time you have in mind. More often than not, people at the payout phase of a variable annuity contract choose to stretch the payments out to last for around 20 years. Naturally, the amount that you will regularly receive will depend on how long you want the investment to be provided to you.

A variable annuity, however, is not typically for everybody. If you are looking for a short-term investment plan, a variable annuity is definitely not for you. Whatever you invest in a variable annuity will only get back to you at the specified schedule, and if you want to withdraw your money earlier than said date, you will have to pay additional costs.

If you are planning to invest in a variable annuity, you will get the information that you need through a prospectus, which will contain the investment options available to you. The way you allocate your total invested amount among the various funding options will matter greatly and will affect the overall benefit you receive from the contract.