Despite all of the negative talk often surrounding variable annuities, they are still the highest selling annuity product in the industry. There are good variable annuity products out there, and bad ones as well, so it’s important to be able to tell the difference. The best way to determine if a certain annuity product is right for you is by speaking with an annuity expert and comparing your needs and goals with the potential benefits.
Annuity products are the opposite of life insurance. You pay a lump sum of money up front and then receive monthly income for a specified time frame or for the rest of your life. Annuities protect your money and offer some type of growth as well, depending on the product. Variable annuities allow you to invest your money in sub accounts, which function in a similar manner to mutual funds. Your specific product and terms will determine how much growth you can receive and when you are able to access your money.
Variable annuities provide tax deferral for your money. Your earnings are tax deferred until you start receiving payments from your annuity, often when you are retired and in a lower tax bracket. This is especially helpful for people who have maxed out contributions to 401k’s and IRA’s. Variable annuities also allow you to convert your money into a lifetime stream of income. This is helpful to anyone who is worried about outliving their savings, which is the majority of Americans. Many states allow variable annuity funds protection from court judgements, which is a little known benefit helpful to those in deep debt or in professions that are frequently sued. There are other benefits to variable annuity products as well.
Variable annuities also have some drawbacks though. The products can be complex and their prospectus’s can be hundreds of pages long. It’s crucial to understand exactly what you are getting with your product. Along that line, some variable annuities have high fees for the added benefits they offer. Do an analysis to see if the fees are worth the benefits you are receiving. Most variable annuities have a surrender period where your money is illiquid. Don’t put money into a variable annuity that you might need to access in an emergency. There are attractive growth guarantees for many variable annuity products, but they will cost you more. You have to decide if investing in the markets directly with no guarantees or investing in variable annuities that offer guarantees but lock up your money for a time is better for you.
There are a few other things to consider in regards to variable annuities. Death benefits are important to many consumers, so determine what kind of benefits your annuity offers. Some are enhanced, some are based on account value and others are based on your initial investments. This can make a big difference in the payout to your heirs. Ask the person selling you the variable annuity to visibly demonstrate why this product is right for your individual plan, especially with the fees you will pay. If you determine that a variable annuity is right for you after all of your research, limit your purchase to no more than 25% of your total savings. That will leave you flexibility with the rest of your money.
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