5 Reasons to Buy a Variable Annuity

Variable annuities are on the rise, with total sales topping $37.3 billion in the second quarter of 2013. That’s up 7.8 percent from the year’s first quarter. Read on to discover why so many savvy investors are putting their money into variable annuities.

Variable Annuities Don’t Lock You In to Your Investments

Variable annuities offer a diverse range of investment options. You can typically choose to put a percentage of your money into stocks, bonds, and money market instruments, or diversify your portfolio with a combination of these. The value of your variable annuity will depend on how these investments perform.

One of the great advantages of variable annuities is the ability to monitor your investments and move them around to maximize your earning potential. Insurers often charge transfer fees to make these changes, but if you’re smart your investment decisions can offset these costs.

Variable Annuities are Tax-Deferred

A variable annuity is made up of series of investments and an insurance contract which looks to protect you from financial hardship. Amongst other things, this insurance contract states that the tax on your investment earnings will be deferred. Put simply, you won’t pay taxes on your investment until your variable annuity enters the payout phase. You also won’t be taxed when you transfer your money from one investment type to another, although you may be liable for transfer fees.

Variable annuities are often criticized for their high fees, but the benefits of the tax deferral can outweigh these charges if you’re making a long-term investment. That makes them an attractive option for anyone planning for their retirement.

Variable Annuities Provide a Guaranteed Income Stream

Once they enter their payout phase, variable annuities will provide you with a guaranteed income stream. This might be for a set time or an indefinite period, such as your lifetime or your spouse’s.

This feature provides comfort for people hoping to live to a ripe old age, as they know they can count on this guaranteed money for support. After all, a healthy 65-year-old man has a 33 percent chance of living beyond 90. His healthy 65-year-old wife has a 44 percent chance of reaching the milestone. That means there’s a 50 percent chance that at least one of them will live beyond 90, an age where many find their savings have run out.

These guaranteed payouts can also increase the security of a portfolio made up of investments that will rise and fall, such as stocks and bond mutual funds. In the event of a downturn, variable annuities can provide the dependable income retired investors need while the market’s recovering. Don’t think these downturns won’t occur either. We’ve seen share prices slump twice since the turn of the century: once when the tech bubble burst and again during the global financial crisis. Can you afford to take the risk?

Variable annuity fundamentals dictate that the size of the payments will depend on how the investments perform over time. It’s important for investors to monitor this performance to maximize their payouts.

Variable Annuities Offer Death Benefits

Your death will have a profound impact on your spouse. The death benefits offered by variable annuities ensure your loved one has time to grieve without wondering how to make ends meet. With a basic death benefit, your insurance company will pay at least the amount you’ve put into your variable annuity. This offers real peace of mind if your investments have dropped.

In addition to this no-frills death benefit, most variable annuity policies also allow you to add extra benefits known as “riders”. For an additional percentage fee, you can apply monthly or annual “step ups” to your variable annuity. On a monthly step-up, for example, your insurer will assess your account value each month on your policy anniversary date. The highest monthly value is noted and used as your new death benefit amount. In this way, market improvements are locked in and passed on to your beneficiaries when you die. Annuity calculators can help determine exactly how much the annuity is worth.

Variable Annuities Offer Living Benefits

You needn’t wait until you’ve passed on to enjoy a few extra benefits from your variable annuity. Almost 90 percent of people who invest in variable annuities pay for a living benefit. This perk protects investors from market drops and locks in a guaranteed income amount, similar to a pension, for life. This guaranteed income can also rise with the market. Think of this living benefit as a kind of safety net which protects you in your old age. The best nets will cost you more, but they’ll also offer much better protection.

Of course despite all these advantages, variable annuities won’t be right for everybody. Make sure you do your research before committing to this investment.

1 comment to 5 Reasons to Buy a Variable Annuity

  • For me, the largest problem with this product is the lack of disclosure. Unlike a mutual fund or ETF, it’s quite difficult to get a prospectus or decent description of the product without direct dialog with a salesman. This is an insurance product wrapped around a security.
    Given the product has a fee, I’d love to see a detailed description comparing a VA to a stright investment in say, an S&P ETF. Some straightforward numbers, “The 2% fee each year pays for the downside protection, i.e. in up years you will lag the market, but in down years, your money is safe.” And then a comparison over different time periods, even a decade at a time. I’ve never seen such a comparison, and don’t suspect I ever will. And when reader tell me of the promises the agents make, they never seem to get those promises in writing.

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