Are Variable Annuities Good or Bad?

Annuities are financial instruments where, upon contract, people invest a bulk or rather a capital sum which is collected, grown and then repaid in a structured settlement form or installments to the investor. It must be noted that even though it shares many features of life insurance an annuity contract, or a variable annuity, is not a life insurance policy.

The definition of this financial instrument is not at all helpful. Here's a proper explanation. Retirement plans, insurance contracts, collective investment schemes, financial instruments, are made by finance companies, banks and investment firms so that people can invest in them to reap benefits from them for a prolonged period.

• An annuity is a contract between the annuity provider (also known as custodian or investment manager or insurer) and the annuitant. The annuitant pays either a huge capital sum to the insurer or pays a series of large installments. These funds are then put forth into several reliable investments, and are 'grown' or 'multiplied'.
• Then, upon maturity or annuitization, the funds are repaid to the annuitant on the basis of a series of installments or one bulk installment.

What are Variable Annuities?

There are is nothing different or complicated about variable annuities. The aforementioned process was that of an ordinary annuity. The variable annuity has a slightly different mechanism. Here, the rate of return is variable. It means that the rate of return is dependent upon the economic conditions, and in some cases, on some specified indexes. Upon maturity a specified amount is returned to the annuitant, however the later, remaining payments are based upon the economic performance of the investment. Thus, the variable part of such an annuity basically works like that of a mutual fund.

The Good and Bad of Variable Annuities

Now coming to the debate, variable annuities, good or bad? The problem is there is no specific answer to this, hence let us get to know the pros and cons of variable annuity policies:

• Advantages: The big plus point is that there is a huge chance of making a lot of money, by just sitting back and relaxing. A dream of every man right? However there are some difficulties in this advantage. Firstly, you will have to make sure that the economic conditions or the index are going to boom or not. Calculate a percentage rate of return based upon your investment and the fixed portion. You can take a look at the financial planning of other types of investments and compare the rates of return.
• Disadvantages: The only disadvantage that can be pointed out is the lower rate of return, in cases where the economic conditions are not booming. In such a condition there is a high probability the fixed annuity will yield a higher rate of return.

The best way to invest in a variable annuity is to look for good economic conditions. Apart from that, secure yourself with other investments such as another fixed annuity, life insurance, IRA and mutual funds. After investing in such reliable avenues, think about variable annuities as their rate of return is not fixed.