17 November 2009

7 Essential Characteristics of Variable Annuities That You Should Understand

Some essential characteristics of a variable annuity include the following: it is a contract that an annuitant purchases, it offers a variety of investment options, it uses mutual funds, it provides stable income, it requires the annuitant to pay certain fees, it has two phases, and it is tax-deferred.

An annuity is an investment made by an annuitant. The returns may be distributed to the annuitant biannually, annually or quarterly. Annuities are insurance products that are typically integrated into retirement programs. It helps the annuitant or his or her recipient receive stable income when the annuitant stops working. There are several types of annuities and Annuity Leads are useful in matching potential annuity investors to the right annuity type. If you are interested in investing in an annuity, you might want to consider the variable type of annuity. But first, here are some things that you should understand about it.

It is a contract that an annuitant purchases

Like other annuity types, a variable annuity is an agreement made by two parties: the insurance company, who is the insurer, and the annuitant, who is the investor. The annuitant is given the option to purchase the variable annuity contract either through a single payment or by paying a series of installments.

It offers a variety of investment options

Variable annuity investors are offered a variety of investment options that they can choose from. These may include bonds, stocks, money market vehicles or an assortment of these three.

It uses mutual funds

Typically, mutual funds are used in variable annuities for investing in bonds, stocks and money markets. The investment process works like traditional mutual funds where there is no guaranteed value. Just like traditional mutual funds, the investment values will correspond to the performance of the annuitant’s chosen investments. However, unlike ordinary mutual funds, switching from one fund to another will not incur any costs or sales charges on the part of the investor.

It provides stable income

Like any annuity product, variable annuities give the annuitant the opportunity to have a stable source of income over a particular period of time. Depending on the contract stipulations, the annuitant may receive the payments from the insurer immediately or at a later date. The annuitant can also decide whether to receive the returns in lump sum or in a payment stream made at regular intervals.

It requires the annuitant to pay certain fees

There are certain fees that have to be paid when purchasing variable annuities, as well as charges for the mutual fund investments. Typically, these fees include surrender charges, expense risk charges, administrative charges, underlying fund costs and fees for other special features.

It has two phases

Variable annuities go through two phases. The first phase is the accumulation phase where the purchase payments are made and subsequently allocated to the annuitant’s choice of investments. The second phase is the payout phase. This is where the purchase payments made are returned to the investor together with any earnings that have been gained from the investment options.

It is tax-deferred

One important characteristic of a variable annuity is that it is tax-deferred. In other words, the investor’s income and gains from the different investments will not be taxed until the money is withdrawn or taken out of the variable annuity.

In the end, just like any other investment, the outcome of variable annuities will depend on the annuitant’s decisions and objectives.

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