What is a Variable Annuity?

Variable annuities offer more choices than fixed or guaranteed annuities. Some of the things they offer that are not the same as a fixed annuity are, tax deferred earnings, a choice of payouts, plus the opportunity to make unlimited contributions if the annuity is nonqualified. The things that it offers different from the fixed annuity is that you have a potential for making more money and it also gives you more involvement on how to allocate your assets among your investments.

With all annuities one thing is constant, you can select guaranteed lifetime income. Some of the things that differ from a variable annuity from a fixed annuity are: 1. Variable has greater potential rewards, and with a fixed there is no inflation protection. 2. With a variable you have various levels of risk and the fixed has a guaranteed return. 3. A variable gives you a choice of investment portfolios whereas with a fixed the company manager chooses investments, and 4. A variable keeps assets in a separate account whereas with a fixed the assets are in a general account.

Allocating the Funds

You will create a portfolio when you buy a variable annuity. You will allocate your money among a number of investment portfolios, also called sub accounts or variable accounts. The accounts are like mutual funds, either designed specifically for the annuity company or similar versions of existing funds. Even though the names of these investment portfolios are similar or have the same they are not the same funds. You have the opportunity to choose from which of the issuing companies you want to invest in. This is similar to what you would do with a 401(k) plan or a 403(b) retirement plan. Your choices will be made from stock portfolios, money market account, a government bond portfolio, a corporate bond portfolio, and a guaranteed account, which is similar to a fixed annuity investment.

Dollar-Cost Averaging

Many times you can make use of the dollar cost averaging. The idea here is that by making equal purchases on a regular schedule, your average price per unit is never the highest price and you actually end up paying less than the average price per unit for the purchase. This can happen because you buy more units when the price is lower. With a variable annuity, you can dollar cost average two ways:

1. You can put your money into your annuity on a regular schedule, which is known as an incremental purchase.
2. You can put a lump sum in a fixed or money market account within the variable annuity and arrange to have it moved gradually into one or more of your investment portfolios.

Death Benefit

One of the attractions the variable annuity has for its investors is the death benefit. If you die before you begin to receive income, your beneficiaries will receive, at the minimum, the amount you put into the annuity. With most contracts, investment gains are locked in regularly so that your beneficiaries receive more than your principal, even if the value has dropped back down at the time of your death. To contrast, a mutual fund pays your beneficiaries whatever your account is worth at the time of your death, even if it’s less than the amount you invested.