Variable Annuity Information and Resources » Variable Annuity Introduction

Features of Variable Annuity Products

admin — Wed, 02 Feb 2011 03:42:20 +0000

What is a variable annuity? As in the case of any annuity scheme, a variable annuity is a contract between you and insurance company to make periodic payment to you starting from a predetermined date. This date can be immediately after making the first payment. One major feature of variable annuity is that you hold the investment option within a range of options offered. The normal options offered are mutual funds. They invest in stocks, bonds, government securities and other money market instruments. The value of your variable annuity depends on the performance of the funds in which you have invested.

Common features of annuity products The most common feature of all annuity products is that the investor or the investor and spouse will get a periodic income until death. The payments to the investor may start immediately or from a date mutually agreed by the company and the party. The periodic payment can be fixed or of an increasing nature. The payment can be stopped after a fixed period or can continue until death. There is no tax on the payments made by the investor. This applies to the capital gains also.

How do you qualify for variable annuity? Anyone can purchase a variable annuity contract. The payment also can be made in one lump sum or in fixed periodic installments. One thing you must bear in mind is that a variable annuity scheme is not good as a short time investment. When you withdraw the money it will attract tax. The charges levied by the insurance company are also considerable making it not attractive for short term investment. Variable annuity is a good investment as a long term one to ensure continued income in retirement.

The appreciation of your investment in a variable annuity depends upon the purchases you make with your money. You are the one who makes the decision on where the money is invested. Part of your money can be invested in a deposit account which brings in a low, fixed rate. Another part can be invested in stocks. The performance of these stocks affects the value of your investment. When the stock value goes up you make a gain. But, if the stock value goes down your loss also will be considerable.

Social security and taxation Payments made to purchase variable annuity is tax deferred. So you get a tax emption to purchase annuity. There is no tax on the appreciation your investment. The tax becomes due only when you start getting payments from the insurance company. That is also due only on the amounts you receive from the company. If you are eligible for variable annuity receipts you can retire earlier than the permitted age of 65. When you retire at the age of 62 you may get a lower social security payment. But, the income from the variable annuity makes up more than the reduction in social security payment.

In a variable annuity scheme, if you select the investments wisely you can make your retirement more enjoyable. It also allows you to retire early.

VARIABLE ANNUITY PROSPECTUS

admin — Sun, 23 Jan 2011 03:31:21 +0000

If you wish to invest in a variable annuity, you must know– what the product is, what purpose it serves, the special features of the annuity, the fees and charges payable, particulars of investments, death benefits provided, and encashment options. The variable annuity prospectus arms you with this data so that you can compare the costs and the benefits with other annuity schemes, investment avenues and mutual funds and decide what suits you.

What is a variable annuity prospectus?

A variable annuity prospectus is nothing but a document provided by the insurance company over viewing its variable annuity scheme, that helps a consumer understand the costs and benefits of its variable annuity contract. It educates the consumer, helping him to make a proper investment that suits his requirements.

What key information does it contain?

A variable annuity prospectus details all features that can be availed with the contract, data about fees and other expenses charged by the company and investment options. Financial data reveals the total funds allotted to each investment option referred to as sub accounts along with their past performance analyses.

The prospectus also clarifies how funds can be moved between sub accounts as you change your investment options. It shows how each sub account is linked to the stock market. You will find details regarding the actual objective of the investment, its fund manager and the method of investment applied.

Why is it important to read it?

In the US, Variable annuity contracts are registered securities products that are controlled by the Securities and Exchange Commission (SEC). It’s a statutory requirement of the SEC that a variable annuity prospectus should be made available to all consumers who sign variable annuity contracts. The prospectus is delivered in the printed format and mailed to the customer. It’s also posted in the company website for ready access.

It is also mandatory for the consumer to be informed about changes made in the investment options. The insurance company is required to circulate updates to variable annuity contract holders until new prospectuses are issued by the insurance company.

The general idea is to make the document as transparent as possible to protect the consumer from scams and frauds. It also serves to educate the consumer so he can make an informed decision.

Meeting all statutory obligations makes the annuity prospectus a scary big document, sometimes over 100 pages. Variable annuity purchasers get to review everything about the annuity contract to enable them to ensure that the contract fulfills the purchaser’s investment aims.

It is better to engage the services of investment professionals- the independent financial advisers (IFAs) – to analyze the information in the annuity prospectus and assist them to choose the variable annuity that suits their needs.

Variable annuities have gradually become indispensable tools in planning retirement and investment options. Ensure to obtain your copy of the variable annuity prospectus from the insurance company. Please take the time to read and understand the fine print so you get to safeguard your investment and avoid costly mistakes!

Variable Annuity Comparison

admin — Sat, 08 Jan 2011 03:22:30 +0000

Features of variable annuity Unlike the fixed annuity, the variable annuity has a variable return. Thus, appreciation in value of your investment is different in the case of every investor. There is no guaranteed rate of return as in fixed annuity. It is you who tells the portfolio manager of the insurance company where to invest your money. Each owner of the variable annuity makes a different decision. So the return also is different. The investor need not put all his money on the same equity. S/he can allocate the money for different equities on a proportion decided by him/her.

The main advantage of variable annuity is that the decision making on investment is vested in you. You have full control over it. If you are a wise or lucky investor you make money on your decisions. The disadvantage is that you are responsible for losses due to poor investment decisions. If you are lucky, the investments will grow at a rate much higher than the fixed income annuity. Otherwise, there is every chance to see the value plummets. In actual practice, in the long term, say 25 years or more, the return is seen as much higher in the case of variable annuities.

How to compare features While selecting an annuity scheme, the first priority must be for the company. The company must have a reputation for fair dealings. It must have high rating by rating agencies. Their past history on settlements on claims must also be considered. Premium protection is the guarantee to get back at least the amount you paid, even if losses were made due to poor investment decisions you made. It is wise to select an annuity with a premium protection. You will continue to get the annuity payment until the original investment is finished. An annuity, connecting the annuity payments you get with the then cost of living, is surely a better option.

Another feature you must look for is the joint and survivor benefit. It will entitle your spouse to receive annuity payment until death even if you die earlier. All annuity schemes make you eligible for tax deduction for the money you pay because it is a retirement saving. The tax becomes due only when you receive the annuity and the tax will be at the ruling rate when you receive.

How to compare fees There are several fees charged by the insurance company and IRS in the case of premature withdrawals. Such fees are different for different companies. Almost all companies charge a percentage of your capital, but at varying rates. IRS also charges a 10% penalty tax for taking out tax-exempted money. Other charges by the companies are Mortality and Expense Risk, Account Maintenance and on many other counts. Everyone who wants to purchase an annuity scheme must ascertain the possible fees from the company beforehand and compare them with those of the others.

Variable annuities are very helpful for most of the people. But for those who cannot exercise financial disciple it may end up in big losses.

How to Take Advantage of Variable Annuity Products?

admin — Fri, 24 Dec 2010 03:17:21 +0000

If you are interested in acquiring a variable annuity package, this article is going to show you how to take advantage of the various products a variable annuity package has to offer. Your money is hard-earned. As such, it is important that when you invest it into a variable annuity, you have to make maximum use of it.

Variable annuities are retirement planning products that offer you the opportunity to take advantage of market gains over time. A variable annuity’s rate of return fluctuates with the prevailing investment returns of the market (hence the term “variable”).

Variable annuities are by their nature, tax-deferred. This means you only get to pay tax on the interest it has accumulated at the payout stage. Tax-deferment is one way a variable annuity can be exploited to the annuitant’s gain. A study of the rate of returns of tax-deferred variable annuity as opposed to a savings investment for example, will show a superior rate of returns for tax-deferred variable returns, provided the interest returns does not drop radically in that time frame.

Another way to take advantage of a variable annuity product is what is known as “annuitization”. Annuitization is a process of converting part or all of the money in an annuity contract into a stream of regular income payments for your lifetime. You can also get the option of picking a beneficiary or dependant to be a joint annuitant and both of you can receive the payments according to the stipulated contract. This can be a valuable income stream.

A variable annuity can also give an annuitant the option of choosing from a wide array of variable investment options that fit retirement goals and risk tolerance as well as lock in gains and leverage guarantees to help keep the annuity investment secure.

Another way to take advantage of annuity products is to get an annuity package that offers guaranteed death benefits so that your beneficiaries can still receive payments after your demise.

An annuitant can also take advantage of the fact that there are no limits on contributions to put away a sizeable amount of cash (if you have it) so that the money can be put to better use.

These are ways to take advantage of a variable annuity package. It is good practice though to discuss options with your financial advisor.

Variable Annuity Fees

admin — Thu, 09 Dec 2010 03:10:39 +0000

The commonest variable annuity fees are as follows:

1) Mortality Expenses: If you purchase a variable annuity, it is most likely going to come with a mortality and expense risk fee. This is a variable annuity fee charged by the insurance company to assume the risk of providing you with guaranteed future payments, taking into account the fact that future unexpected events (such as untimely death) could occur. The insurance company then prices these risks inherent to the structure of an annuity packages it into a charge for the annuitant. This variable annuity fee can range from .50 – 1.5% of the policy value per year.

2) Surrender charges: A surrender charge is a type of fee an annuitant must pay if he or she withdraws money from the variable annuity under the so-called “surrender period”. This is a set of time that typically lasts between 6 to 8 years and this charge tends to reduce the value of an annuity. Surrender charges were designed by annuity companies to stop an annuitant from cancelling the annuity contract before a set time so that they can recoup whatever costs they have incurred in providing the annuity. The potentially draconian nature of this fee is a good reason why annuitants must study the terms of their variable annuity before signing the contract.

3) Administrative Fees: These are regular fees that are charged to cater for the cost of administering the variable annuity. These are costs associated with mailings, record keeping, phone calls, fund transfer charges, etc.

4) Rider Costs: Riders are extra benefits provided by the variable annuity contract in the event of death. These are charged for by the insurance company.

Other variable annuity fees such as contract maintenance fees, premium taxes and investment expense ratios are also charged. The specific fees to be charged are usually contained in the variable annuity contract.

As a general rule, it is good practice to find out how much commission is being paid by the insurance company to the agent who is trying to sell the annuity. These commissions are always built into the variable annuity fees. So the lower the commissions, the less an annuitant can expect to pay in variable annuity fees.

Variable Annuity IRA

admin — Thu, 22 Apr 2010 12:49:05 +0000

What is variable annuity IRA? IRA or Individual Retirement Account entitles you to certain tax deductions. These tax deductions are offered to encourage savings for retirement. Under certain conditions you can claim tax deduction for the contributions made to IRA. Further, the growth of your fund is also not taxed when it is accrued. The growth is invested again and earns further tax free growth. Income tax becomes due only when you get back your money. The tax is charged at the rate of that time. If you withdraw the savings before passing the retirement age you are liable to pay penalty at 10% in addition to income tax. The retirement age is determined by IRS from time to time. The current retirement age is 59.5 years.

Variable annuity ensures a periodic or lump sum income for you in return for money you pay to the insurance company. The money you pay also can be a single large payment or mutually agreed installments over a period of time. In both variable annuity and IRA you keep the option to determine where your money is invested by the company or bank. Variable annuity IRA is investing your IRA money in variable annuity.

Why it is important to consider IRA? Investment in IRA attracts tax deductions in two ways. Tax deductions on IRA investments are allowed by the government to encourage savings for retirement. Contributing to IRA ensures a steady continued income for you even after retirement. Even while capitalizing your income, the part of your income put in IRA is tax-exempted. Some limits for investments in IRA are fixed for everyone. The IRA investment should not exceed the total reported income of the individual or couple. Separate upper limits are fixed for singles and couples. These limits are determined by the IRS on an annual basis. Your total income or the fixed higher limit, whichever is lower, is enforced.

There are several other types of IRAs. Roth IRA is one important variety. There are two important features for Roth IRA which makes it different from the traditional IRA. Income tax is not payable when money is withdrawn from Roth IRA funds. But only taxed money can be invested in the account. There are other plans like Simplified Employees Pension (SEP) IRA, Self Directed IRA Educational IRA and Savings Incentive Match Plan for Employees (SIMPLE) IRA. Each of them has its own goals. The Educational IRA is particularly useful to students because tax exemption is permitted both for contributions and withdrawals.

Interaction of variable annuity with IRA Some investment advisors are known to encourage putting IRA funds in variable annuities. It is not a wise move according to experts. Both IRA and variable annuity are eligible for tax deduction. Reinvesting the same funds in a second tax-deductable plan does not bring in any additional benefit. On the other hand the investor loses money on commission and transfer charges. You also will have to pay fund administration charge twice.

IRA is a good investment avenue for individuals and small businesses to take care of their retirement.

Types of Annuity Products

admin — Mon, 08 Mar 2010 10:12:01 +0000

One of the best retirement products on the market today is the annuities contract. This allows an individual to hand over money to the life insurance company and then get back such money over their life time on a growth and tax-deferred basis scheme. The insurance company calculates the amount they need to pay to you depending upon the type of annuity product you choose, the term of annuity you go for, and your age and gender as well. Coming with an option for a guaranteed distribution of income, such annuities are not that easy to understand and these complex investment vehicles seem to branch out into numerous types of annuities – each with its own plus and minus points.

Fixed annuities

In case of a fixed annuity, the insurance company pays you a guaranteed return for the money you invest with them. Such fixed annuities help you to receive a guaranteed amount of interest but with limited flexibility options. The interest that you gain is the tax deferred which you do not need to pay until you make a withdrawal. These types of annuities come with high surrender charges that might prevent you to withdraw money for a period of 5 years or more. If you choose to go for immediate fixed annuity, such payments will not fluctuate in tune with the inflation. Once you choose to go for such annuity scheme, you have no recourse to the principal and only the fixed streams of income such principal will generate.

Indexed annuities

In case of an indexed annuity, the insurance company pays you as per the stock exchange moves. In other words, your investment is linked directly to the equity index. The popular index used to measure such income is the Standard & Poor’s 500 Composite Stock Price Index. This type of annuity is more popular since it provides you an opportunity to make one of the best investments – not only do you get the chance to earn potentially attractive returns but also a guaranteed minimum return on your investments. This type of annuity is considered to be a ‘fixed’ annuity and the legal issues involved are minimum. In reality, such investment of yours is not actually invested in the stock market yet you are given a chance to earn a percentage of the index gains over a limited period of time.

Indexed annuities provide you a comfortable earning on your money invested with the insurance company. Unlike variable annuity products that must be registered with the SEC, there are no federal restrictions imposed with regard to indexed annuities. Even the brokers do not need any particular security license to sell them. The money you gain from such investments could be determined via annual indexing or some other methods. The top three advantages of such indexed annuities are:

Provision against any loss of income in future.
Rate of interest paid guaranteed.
Provision for competitive rates of return.

Immediate annuities

Security and comfort are the major reasons why you should choose to go for immediate annuities. Though you have no recourse to the principal once you choose to go for such annuities, you can be assured of a good income stream for the rest of your life. This is especially a good way to make your investment in post retirement days. Even if your have not planned ahead for your retirement, such annuity contracts can help you to make the leap in time.

There are different types of immediate annuities like the fixed immediate annuity, inflation-indexed immediate annuity, and variable immediate annuity. If you choose to go for the fixed immediate annuity, the income you receive each month will remain fixed throughout the period of your annuity contract. In case of an inflation-indexed immediate annuity, you will receive a fixed annuity income that will rise each year based on a predetermined formula. This is also a type of fixed annuity contract. In case of a variable immediate annuity, there is no guaranteed stream of income promised to you and instead the amount of income you receive is directly related to the performance of the underlying investment portfolio. In such case the payment you receive will keep changing now and then and such amount may be reset at a particular time as per how your contract has been structured.

Advantage of variable annuities over other annuities

Fixed annuities provide you with a continuous flow of income. Such income is fixed and you cannot hope to earn any more than that over your investments. However that is not what most people are looking for when they invest their money in annual contracts. This is where variable annuities have an edge over the fixed and other types of annuities.

Variable annuities allow you to choose where you invest your money and also have potential to provide you with better returns. Although the risk associated with such variable annuities is higher, the returns also are going to reap you in more profits. Maybe this is why today variable annuities have won the popular race in retirement products and service section.

What Is a Variable Annuity?

admin — Sun, 27 Dec 2009 00:54:25 +0000

Explain variable annuity why is it different to other types of annuities?

Variable are legal contracts between insurance companies and people, where the insured is paid periodically from a predetermined date. It is useful as part of a retirement plan or investment. The investor can either pay a series of payments or a lump sum amount to the insurer.

The person insured is offered various options for investments. However, the most common option is mutual funds. This means investing in money market, stock, bonds or a combination of these. The investment value depends on the investment options that are chosen.

There are various types of annuities available in the market. Each has its own set of costs and features. Immediate and deferred annuities are the two basic forms of annuities.

In case of an immediate annuity, the payouts are provided at once. The payouts depend on the contract terms, and can continue for life or a certain period of life.

Deferred annuities are of two basic types, fixed and variable. In case of a fixed annuity, a guaranteed interest rate is provided over a specific period that varies from 1 to 5 years. Where variable annuities are concerned, the interest rate depends on the value of the underlying investment and can change according to it. For investment purposes, variable annuity investors can choose from money market funds, bond and stock for diversifying portfolios or managing risk.

What protection or benefit does it provide?

The following are some of the common available benefits of variable annuities.

Guaranteed Death Benefit: If the investor dies before benefits of the annuity begin to get paid, then the beneficiary named in the contract receives a death benefit. Different companies or contracts have their own way of determining death benefits. However, in general the beneficiary receives the invested amount or the value of the contract’s most current policy anniversary statement, whichever amounts to a greater value. The guaranteed death benefit gives peace to an investor. He or she knows that the money will fall in the correct hand in the case of unforeseen circumstances

Guaranteed Earning Increase Death Benefit: This option enables the beneficiary to receive the higher of an investor’s account value or investment amount. In addition to this, there is a predetermined annual increase that takes place on the investor’s death.

Guaranteed Minimum Income Benefit: Irrespective of how the bond or stock market performs, when the annuity is annuitized this option guarantees a minimum payment. The investor’s investment is compounded by a predetermined rate in order to calculate the guaranteed future payment.

Guaranteed Minimum Withdrawal Benefit: The main idea behind this is that investors can withdraw a maximum percentage of their total investments each year for a specific period until hundred percent of the investment has been recovered, irrespective of market performance.

Guaranteed Lifetime Withdrawal Benefit: This guarantees an investor a minimal withdrawal amount throughout his or her lifetime. The contract does not have to be annuitized and this benefit comes irrespective of the subaccounts performance.

Guaranteed Minimum Accumulation Benefit: With this, the investors are allowed to protect their principal. This happens either with the acceptance of the annuity company’s guaranteed return during a specific term or by locking in growth.

What are the advantages?

Variable annuities have quite a few advantages. Let us take a look at some of them.

Flexibility: Decision about the amount of money to be invested and its allocation for investment options is in the hands of the investor. A person can also decide when to start taking income. All this is possible because the annuity is nonqualified.

No limits on contribution: As long as the products chosen are within the guidelines, the investors can invest as much and as many times they want to.

Rebalancing and tax free transfers: In order to achieve long term goals, the investor can transfer between investment options or rebalance. Though some transfer limits may apply, but on the whole there are no current tax consequences.

An income payout option for life: This is an important benefit provided only by annuities. So there is no reason to fear the fact, that the investor will outlive the income.

Flexibility in withdrawal options: Various withdrawal options are provided by variable annuities. However an important point should be noted here, any optional benefits as well as the value of the death benefit will get reduced by this. Also, income taxes are levied on distributions and withdrawals. A ten percent federal tax penalty along with withdrawal charges can be applied if these are taken before the investor reaches the age of 59½.

What are the fees and costs and how is it charged?

There are two types of fees associated with variable annuities. These include the annuity contract cost and the variable insurance funds expenses that are inclusive in the contract itself.

The annuity contract charges include the administration fees that are a fraction of an investor’s annuity assets and are usually a flat contract maintenance annual fee, and an ongoing asset based mortality and expense fee. These charges are subtracted from the investor’s annuity contract value.

Investors are charged a certain amount of their annuity contributions if they withdraw the money in the starting years of the contract. Upfront sales load are usually not charged. This is known as a contingent sales charge.

Certain annual operating expenses are levied on variable insurance funds. These include shareholder mailing cost, distribution fees, management fees and other miscellaneous costs.

What are the risks?

The investment characteristics of the variable subaccounts are different. The investors’ shares may fluctuate and can be worth more or less their original cost. This is because it depends on the fluctuation of the investment return and principal. Therefore, an investor should try to invest only in those funds that are consistent with related risk tolerance levels and investment objectives.

Also if an investor dies prematurely when the payment annuitization has begun, the insurance company can forfeit the account balance.