Pros and Cons of Variable Annuity

Variable annuity is often considered as one of the best retirement planning options. But Before going for a buy of a variable annuity, you should be loaded with a bunch of questions to be asked to the insurance agent, broker, financial advisor or planner, and other financial professionals. Since money will be involved in the plan, knowing about the pros and cons of variable annuity would give you a clear understanding, if owing the account would be a wise decision or not. The benefits or payouts of a variable annuity account is entirely governed by the performance of the market and the investment choice. The bottom line of this kind of annuity is that all gains and losses would be borne by your own pocket. Careful planning and a thorough understanding about variable annuities pros and cons is what is required for maximum profit and minimal loss.

Before going for the advantages and disadvantages of variable annuity, one should always remember that variable annuities are designed for long-term investments and are not recommended for short-term period. In short-term investments, early withdrawal of money may give rise to substantial taxes and charges.

Advantages of Variable Annuity
Unlike a fixed annuity, funds in a variable annuity are subject to rise. If the stock market and share rise, the funds would also grow bigger. So, a bigger income can be expected in the long run.

Variable annuities offers periodic payments, death benefits and tax-deferred benefits. Periodic payments are ideal for retirement plans. The annuitant would receive periodic payments for the remainder of his life, from the insurer; as per the agreement. People go for variable annuity lest they should exhaust their assets.

The death benefits that variable annuity offers is another important factor. Unforeseen incidents may occur which may cause death to the annuitant, before the periodic payments were made by the annuitant. In such a case, the nominated beneficiary is liable to get at least the amount of the purchase payments. An important thing that you need to note here is that the beneficiary would be eligible for the payment in case the account's value being lesser than the guaranteed amount.

The tax-deferred benefits features, no amount of tax being levied upon the investment gains, until the withdrawal at retirement. Money transfer from one investment to the other within the plan is also tax free. During withdrawals, the tax deduction will be done at normal income tax rate. This tax-free feature is similar to a Roth IRA.

Disadvantages of Variable Annuity
The annuity will decrease it's value, if the funds in which the annuity is invested loses its value. However, this does not happen in the case of a fixed annuity.

The tax-deferred benefits would no longer hold useful if the annuitant avails another plan which offers tax benefits. The IRS levies a 10% tax penalty on withdrawals before the annuitant turns 59.5 years of age.

Investment in variable annuities are accompanied with several charges that reduce the account's value and the return on investment. Surrender charges come in case of a withdrawal within the first eight or ten years (known as the surrender period). The annuitant would owe a surrender fee known as 'surrender charge'. This charge is calculated as a percentage of the withdrawal and is applied in order to meet the expense of the sales agent. The surrender charge gradually declines in it's value after a period of time; from 6% to 0 over five to ten years.

Mortality and expense risk charge is levied on the annuitant at the rate of 1.25% annually. The insurance company charges these costs as a recovery for their insurance risks and their payment for selling the variable annuity.

Admin or management fee is also incurred by the annuitant. Every year a certain percentage of fee is deducted from the account for record-keeping, paper work and other administrative costs. Mutual funds that are the underlying investment options, impose certain expenses which are borne by the annuitant and paid indirectly. If the variable annuity offers special benefits, then the benefits would also come along with certain charges and fees.

Variable annuities are loaded with innumerable advantages and disadvantages, and it might be not possible to explain all of them in black and white. So, a financial professional is the best source of information to help you in your decision. While considering for a variable annuity, have a thorough idea about the different charges from the prospectus available. The important point is to research and be prepared with all possible queries regarding the annuity. As mentioned earlier, a detailed study about the pros and cons of variable annuity would yield more benefits and profits than future losses.