How to Allocate Funds Inside A Variable Annuity

Annuities are contracts between an investor and an insurance company that allows the purchaser to accumulate funds without getting taxed on the income until the first withdrawal is initiated. There are several of different types of annuity products that exist and are offered, each with their own particular benefit and features that may appeal to the investor. For the savvy and novice investor alike, various levels of risk and investment controls can also be appropriated with annuities.

A variable annuity is a tax-deferred annuity and is one that allows its purchaser the freedom to choose among various types of mutual funds and to allocate a particular percentage to each fund with varying amounts of risk. Each variable annuity issuer may provide a number of diverse mutual funds to choose from, including a standard fixed annuity fund option that could complete a portfolio. Ultimately, before electing a variable annuity, the investor is should determine the amount of risk he or she is willing to stomach and then research all available options provided. Some insurance funds, for example, provide higher risk international mutual funds; others provide “socially responsible” funds which meet a particular criteria for companies those funds invest in.

A variable annuity is broken down into two general phases: the accumulation phase and the distribution phase. During the accumulation phase the investor has the ability to allocate his or her investment payments in a number of different mutual funds and with particular percentages for each. The investor usually invests in annuities with either “after tax” or “pretax” funds, which need to be considered when the tax burden is imposed during the distribution or withdraw phase. The distribution phase can be set up according to the investors needs after a certain period of time. For example, the investor may elect to withdraw the funds in one lump sum or take out a percentage per year.

The uniqueness of the variable annuity is that it allows the investor to choose the weight of investment in each fund he chooses. So for example, an investor may elect to allocate 25% of his funds into an international higher risk mutual fund, 40% into a fixed rate fund, and the 35% into a stock fund. Now the overall performance of that variable annuity will be determined by the performance of each of the allocations over a period of time. Each insurance company issuing the annuity may vary on their options, so you should thoroughly research the available funds and their market performance. During the accumulation phase, you may be able to transfer or change mutual fund allocations and their percentages without paying any taxes, but you may incur a fee by the insurance company for the change.

The ultimate factors that may determine your allocation comes down to your savings goals, your comfort level with the risks involved, and your age. For example if you are in your early 30s than you may elect to have some of the mutual funds allocated to a higher risk and potentially higher risk international stock fund. If you are in your late 60s, you may elect to have you larger portion of your fund to be allocated to a fixed fund. If you have a several annuities and other savings vehicles you may consider a balanced approach of allocating a percentage of the funds based on your level of need for the long term.

The most important thing you can do is stay engaged with your variable annuity account. Some insurance providers may offer different mutual funds that may interest you as time passes and that can deliver the return on investment with the level of security you are interested in.