What Is a Variable Annuity?

A variable annuity is a type of insurance contract that combines investment with retirement income protection. Because the contract is invested in subaccounts tied to underlying investments, such as stocks, bonds, and mutual funds, it can offer higher returns than fixed annuities.

A variable annuity might be a good option if you want to stay ahead of inflation and increase the value of your retirement savings. The following information can help determine whether one might be right for you.

How Does a Variable Annuity Work?

These steps show how a variable annuity works:

• During the contribution phase, you agree to make contributions on an ongoing basis or as a lump sum.

• The insurance company invests the funds in the subaccounts you choose based on the investment options.

• During the distribution phase, specified in the contract, the insurance company sends you payments based on the performance of the underlying investments.

• Depending on the contract terms, payments may be made for a specified period or until your death.

Why Might You Purchase a Variable Annuity?

Many investors purchase variable annuities for the following reasons:

1. Potential Lifetime Income

A variable annuity with a living benefit rider guarantees you an income stream until death. You receive a steady income even if your portfolio goes down due to poor returns or the contract value falls to zero. Although a living benefit rider comes with a cost, the guarantee it offers can be worth the investment, especially with market volatility.

2. Assistance Covering Illness and Long-Term Care

Some variable annuities with a relevant rider let you use part of your policy to pay for long-term care while you are living. This strategy can reduce risk in your retirement strategy.

3. Flexibility for Changing Needs

A living benefit added to a variable annuity provides flexibility for life changes, such as an unexpected illness, job loss, divorce, or loss of a spouse. These factors impact your need for income. Flexible options help you plan accordingly for retirement.

4. Filling Legacy Planning Gaps

Certain variable annuities offer death benefit options that let you lock in additional death benefits to achieve your legacy goals. Because the contract value is likely to last throughout retirement, you should be able to pass on a death benefit to loved ones.

What Are the Advantages of a Variable Annuity?

Purchasing a variable annuity can provide the following advantages:

• Diverse investment options: You can choose among the investments offered by the insurance company. This option has the potential to earn higher returns than fixed annuities.

• Tax-deferred growth on contributions: The earnings in a variable annuity are taxed as ordinary income when you start receiving payouts. Because you might be in a lower tax bracket during retirement, you might pay less in taxes.

• Steady retirement income: Depending on the contract, you could receive a steady income until your death.

• Optional riders: Riders customize the contract to fit your needs. Examples include the flexibility to take withdrawals during your lifetime and return the principal to your beneficiaries upon your death.

What Are the Disadvantages of a Variable Annuity?

A variable annuity can come with the following advantages:

• Fees and expenses: A variable annuity is subject to fees, investment expenses, and potential surrender charges, reducing the return on investment.

• Additional costs: Riders that increase contract flexibility come with extra expenses.

• Limited flexibility: Because the contract is designed to serve as a long-term investment option, withdrawals before the payout period are subject to fees and penalties.

• Capped earnings: Because earnings can be capped, other investment options might offer higher returns.

  
  

You should talk with a licensed financial professional when deciding whether to purchase a variable annuity to ensure it’s right for your financial situation, goals, and objectives.

*This information is for educational purposes only.

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