Pros and Cons of Variable Annuities

There are several important key elements with variable annuities hat may appeal to investors. Variable annuities as investment vehicles, deliver periodic payments for a predetermined amount of time, such as 20 to 30 years, or the rest of your life. This special characteristic of this type of investment removes the possibility that you may outlive your assets and allows for predictable streams of income throughout a specified period of time.

Another important feature is that variable annuities allow you to predetermine a beneficiary in case you happen to die prior to the company delivering payment on the purchases you have already made. This is particular important for investors who contribute funds and would like to protect and re-designate those funds to a spouse of child in case of their death.

Annuities are contracts purchased for promises of payment in the future and are usually backed by insurance companies. Variable annuities are unique among the other types of annuities because they give the investor a tremendous amount of freedom to invest in several types of “subgroups” based on his or her level of comfort. Usually these subgroups come in the form of stocks, fixed money market vehicles, or bond funds.

Another positive benefit is that the accumulation that occurs is tax-deferred. This means you do not pay any taxes on the income gained throughout the year or throughout the entire accumulation phase of the annuity. For example if you made 10% each year for the last 15 years, you would haven’t have to pay a dime of taxes based on those earnings until you started withdrawing on your funds at some point in the future. This provides the ability for you to grow your income and “defer” your taxes to a later date, when at that time, you may be in a different tax bracket altogether.

With variable annuities you are able to choose the funds you want based on the risk you want to take. So for example, if you are a younger investor and would be interested in generating more funds through a higher yielding and higher risk account, you may choose a particular fund that met those expectations or particular criteria. Another feature that is important for many investors is that if you need to change from one variable annuity to another, you can change accounts without incurring any taxes on that money – although the insurance company may charge you a transfer fee.

There are a few cons to the variable annuity which, in general, may exist for all annuities. Variable annuities are not backed by the FDIC and thereby assume a greater possibility of financial loss if the company issuing the promise of repayment becomes insolvent. Nevertheless, there many states do offer a certain degree of investor protection, which may at as a quasi FDIC. Further, a clear precedent has been established historically, that in case an insurance company goes under, another insurance company or group of companies will step in to buy up the contracts from the insolvent company, albeit for lesser amount of the original payment.

Still, variable annuities remain an attractive and safe option for investors for the long haul providing a level of freedom and flexibility that adheres to the needs and goals of each investor. As with any investment, risk management should include a full assessment of the prospectus and soundness of the issuing company.