Variable Annuity Information and Resources

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 Income tax is not payable when money is withdrawn from Roth IRA funds.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.

Variable Annuity Regulations, taxation and industry

admin — Tue, 26 Jan 2010 00:45:19 +0000

If you are one of those millions who are looking for a good way to invest your retirement money, variable annuities could be a great option. This is a very popular insurance contract that provides you payment depending upon the performance of your underlying mutual funds portfolio. Marketed by insurance companies, variable annuities earlier were targeted by various malpractices but now after incorporation of new laws and regulations in this regard, the system has become error proof.

Laws and Regulations:

The annuities contract in United States is defined by the Internal Revenue Code and regulated by each individual state. Variable annuity can be legally put down as a group of investments offered to you by life insurance companies that primarily consists of mutual funds and at times a choice of fixed returns investment choices as well. Under the variable annuity contract, the insurer agrees to make periodic payments to you beginning either immediately or at some future date. The investment options available for you are to make investments in stocks, bonds, money market instruments or even a combination of all three. The variable annuities contract places your accounts separately from an insurer’s general account. Such account is not subject to claims from an insurer’s general account at all.

Taxation Implications:

A variable annuity allows you to receive periodic payments even when you have outlived your assets. This helps you to secure your post retirement days and tax penalties exist only where such withdrawals are made before the age of 59½. In such case the excess benefit received by the investor is charged at normal income rates. This is why variable annuity is called as tax deferred annuities. Non-annuity payouts are penalized and charged as gain and later capital return to the investor. Though the new regulations have reduced the rates of capital gains, yet the rates remain same on variable annuities for withdrawals.

As per section 1035 of U.S. Tax Code, you can exchange an existing variable annuity contract for a new annuity contract. Also, any additional tax can be avoided on the income and investment gains that feature up in your variable annuity account. You may however need to pay surrender charges on the older annuity contract.

Misselling with regard to Variable Annuity:

This is with regard to the dubious tactics deployed by some insurance agents and in spite of steps being taken up by government, they are still at large. The most common example of misselling with regard to variable annuity is its being promoted as a non-taxed income way out. Many people are misled to believe that making such investments will help them to wave off the income tax they otherwise need to pay on such investments. There are also many instances where the insurance agent ploy things up with the help of his buddies and sell such variable annuity contracts to them. These agents who are involved in affinity fraud make use of such relations to make sale.

Industry groups that help understand complexity:

There are many industry groups today who can help you gain rich returns on your investments via variable annuity contracts. Assuming the fees charged to you is same as for the fixed annuity contracts, it is more probable that you will earn more quicker returns on your taxable mutual funds held in regular brokerage account.

Today insurers are being challenged to offer more competitive products. This must be why the variable annuities market has grown by leaps and bounds. The market today is improvising its products for more diversity and hence while you shop around for variable annuities, makes sure you get the best for yourself.

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.