The new variable annuity has become a staple in many people's financial plan. The reason is the guarantees offered by the new variable annuity. The guarantees come in both living benefit and death benefit form. Living benefits offer guarantees to make certain the owner doesn't lose if the stock market or other investments drop below freezing. The death benefits guarantee the beneficiary a specific amount regardless of the stock market performance.
A variable annuity is nothing more than mutual funds with tax sheltering. What makes the new variable annuities so much different is that they include popular funds from a plethora of fund families and of course, contain guarantees no mutual fund can offer.
The tax sheltering of the mutual fund is a benefit for more than tax-free growth. If you own mutual funds and attempt to rebalance as the markets fluctuate, at each rebalancing you have a reportable tax incident. As anyone that actively manages their mutual fund portfolio can attest, it becomes a nightmare to track all the changes in a rapidly moving market. The tax sheltering of the annuity eliminates all the record keeping involved in mutual funds.
Variable annuities aren't all alike, however. Each of them has different surrender periods, charges, funds and guarantees. The interior charges on a variable annuity affect the investment return. The easiest method of finding the best variable annuity is to compare the rate that you'd receive if you invested into the product. Many of the companies offer hypotheticals based on past experience. While they aren't predictions of future returns, they do give you an idea of the policies with the best performing funds and lowest costs.
Variable annuities have guarantees on many products. The guarantees, known as living and death benefits, are different for every policy type. Some of the living benefits offer the guarantee that you'll never lose a penny of principal as long as you leave your funds in a specified length of time. The length of time varies from policy to policy and the some policies actually guarantee more than just the principal but also a specified return on your funds.
Other living benefits guarantee that if you take a specified percentage of income from your policy, you'll never run out of fund. Even if your real market value drops, the company has a second column that shows a guaranteed growth. If you withdraw five percent every year and the guarantee is five percent, even if the market drops ten percent every year, you'll still get five percent of the base amount until you die. If the market increases however, often these policies offer the right of resetting the base amount used to calculate the payment. Of course, if you access more than the five percent allowable, the guarantee cancels.
Death benefit guarantees are important also, particularly if the investments in the variable annuities are heavily loaded in the stock market during a volatile time. The principal may shift wildly as the market fluctuates, but the investor knows that his principal is safe and secure when he has a death benefit guarantee on the balance.
Variable annuities are wonderful retirement product but you need to know what you're buying before you dive in headfirst. It pays to decide what you need, compare annuities and seek the advice of a trained annuity specialist before you purchase any variable annuity.
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