It can be difficult to find objective information on variable annuities. A variable annuity will pay high commissions to the person selling it, so they have a strong incentive to convince you it is the best investment for you. Below you'll find information on what a variable annuity is, alternatives to variable annuities, questions to ask about a variable annuity and much more.
A variable annuity, just like any annuity, is a contract with an insurance company. With a variable annuity, you place your funds with an insurance company and you choose how the money will be invested. You choose investments from a pre-selected list of funds (these funds are called sub-accounts inside of a variable annuity) which can range from aggressive stock funds to conservative bond funds.
Variable annuities are sold as an investment vehicle that can offer significant tax savings by deferring income taxes on the investment gain; you deposit after tax money, and you pay no taxes on the investment interest, dividends, or capital gains, until such time as you take withdrawals. This means you can exchange between investment options inside the variable annuity without triggering taxation. Sounds great…so what’s the catch?
A variable annuity can have expenses as high as 3.00% or more per year. Take the time to understand all the fees and charges before you buy. There are mortality and expense charges, administration charges, fees for additional riders, surrender charges and fees on the underlying investments you choose.
Variable annuities offer not only a basic death benefit, but many contracts allow you to purchase additional riders that enhance the death benefit, and/or provide a type of living benefit; a guarantee as to what you can withdraw from the policy at a later date.
Before you buy, surrender, exchange or cash in a variable annuity, conduct a thorough review by asking these eight questions, which will allow you to conduct a fair comparison between the variable annuity and other investment options.
A variable annuity, especially a broker-sold variable annuity, can have high fees, high surrender charges, and less than favorable tax treatment when compared to many other investment alternatives. For that reason, before you buy a variable annuity, compare it to other investment choices.
After conducting a thorough review of your existing variable annuity contract, you may decide it would be best to either surrender your contract and use other investments as alternatives to your variable annuity, or exchange your variable annuity for a new contract that has much lower expenses. How you go about doing a surrender or exchange will depend on whether your variable annuity is inside of an IRA account or not. Here are the things you will need to know.
