A variable annuity is a contract between you and an insurance company. The insurer agrees to make periodic payments to you, beginning either immediately or at a future date. You purchase a variable annuity contract by making either a single purchase payment or a series of payments.
The underlying investment options for a variable annuity are typically mutual funds which invest in stocks, bonds, money market instruments, or some combination of the three. The value of your investment will vary depending on the performance of the investment options you choose.
Variable Annuities have a few defining characteristics that make them different from other investment vehicles.
1. You receive periodic payments, in most cases, for the rest of your life.
2. They have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount.
3. They are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. When you take your money out of a variable annuity you will be taxed on the earnings at ordinary income tax rates.
Generally speaking, variable annuities are designed to be long-term investments, to meet retirement and other long-range goals. They are not suitable for meeting short-term goals because substantial taxes and insurance company charges may apply if you withdraw your money early. Variable annuities also involve investment risks, just like mutual funds and other investments do.
Before buying any variable annuity, always request the prospectus from the insurance company or your financial advisor. Read the prospectus carefully – it contains important information about the contract, fees and charges, investment options, death benefits, and payout options. You should compare the benefits and costs to other variable annuities and to other types of investments.
source: U.S. Securities and Exchange Commission (www.sec.gov) photo credit: Iman Mosaad