Variable Annuities Explained

In the early working phase of life, little thought is given to retirement planning. However, as people enter their thirties, they realize that retirement planning and saving is not an option but a necessity. More than just saving money, it's better if you let it grow through investments. There are several options in front of you to choose from, differing in the degree of risk involved and the margin of profit. Investing in annuities is an option that many people choose. For most people, understanding annuities can be confusing. It is important that you understand each and every investment option before you go ahead. Your hard-earned money should be smartly invested.

What is an Annuity?

An annuity is a type of insurance policy which guarantees periodical returns and comes with tax benefits. The interest on your investment in an annuity is not taxed until you start withdrawing from it. Your principal investment is guaranteed by your insurance company. Unlike an IRA, there are no IRS controlled limits on the amount you may invest in it. Details vary according to insurance companies and nature of contracts.

It is a kind of private pension fund that guarantees fixed returns after retirement. Being an insurance policy, it usually comes with a life cover, wherein dependents get full benefit in case of death of the policy holder. The insurance companies invest your money and guarantee you fixed or variable returns. You could either opt for a fixed or variable annuity.

What is Variable Annuity?

A variable annuity doesn't guarantee fixed returns as your money is invested in stocks, bonds or mutual funds. That is because, the returns are tied to performance of securities in which your money is invested. This introduces a quantum of risk in this type of investment and hence you need to be ready for that.

While fixed annuity returns are guaranteed, they are low compared to what you could earn through a variable one. Your interest money stays non-taxable till you start withdrawing and you give yourself the chance of better growth. The best part about an annuity is that you can protect your money from taxation and effects of inflation. Of course, variable annuities come with a share of charges or fees that are related to handling of your investments. These include mortality and expense charges. You can opt for a fixed time for return of your investments or opt for lifelong returns.

Variable Annuity - Pros and Cons

One of the pros of opting for variable annuities is of course greater amount of returns. They are an investment in securities with the added benefit of life cover. They should be opted for, only if you are planning for a long term investment. They are not short term investments. An associated con is the high amount of management fees that are charged for an early withdrawal before maturity.

They are no substitute for an insurance policy but they can help as an added source of income in retirement. If you invest in such a variable annuity, let this not be your only investment. Spread out your investments in IRAs and other insurance policies. You can always opt for a direct investment in stocks that pay dividends and bonds.

Variable annuities provide you with an opportunity for better returns. If you can deal with the extra risk that comes with it and look at it as a long term option, you can go ahead and invest in it. Just make sure that you check out the prospectus thoroughly and get an opinion from a trusted financial adviser before you go through with it.