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Variable Annuity Basics - What You Need to Know Before You Buy

A Variable Annuity Is A Complex Investment - Here's What You Need To Know


Variable annuities are complex contracts with an insurance company. There's a lot you need to know before you buy one, or before you cash one in. Below you'll find information on what a variable annuity is, alternatives to variable annuities, as well as questions to ask to compare this product to other alternatives, or evaluate one you may already own.

1. What Is A Variable Annuity?

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.

2. Beware - Variable Annuity Taxation Not So Great

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?

3. Variable Annuity Fees And Expenses

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.

4. Variable Annuity Death Benefits and Living Benefits

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.

5. 8 Questions To Ask About Your Variable Annuity

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.

6. Alternatives To A Variable Annuity

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.

7. 5 Reasons to Keep Your Variable Annuity

Cashing in a variable annuity is not always the best option. Some of them have unique benefits that can no longer be purchased. In this article annuity expert Mark Cartazzo, who founded Annuity Review, talks about five unique features that some variable annuities offer. If your annuity has one of these features, you'll want to think twice before cashing it in.

8. How To Surrender Or Exchange Your Variable Annuity

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.

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