Guaranteed Variable Annuities Explained
Like all annuities, guaranteed variable annuities represent a contract between an individual and an insurance company. In exchange for providing the insurance company with a specific amount of money, paid either as a single premium or multiple premiums over time, the insurance company guarantees payments. The payments can begin at some point in the future or immediately, depending on the needs of the contract owner.
What Sets Them Apart
What sets guaranteed variable annuities apart from other annuities, however, are the types of investments that are available and the death benefit. Variable annuities offer a number of different investment options, usually in the form of mutual funds. A variable annuity owner can typically choose among aggressive and conservative funds, foreign and domestic funds and equity and bond funds. The number and type of funds available depends on the insurance company, but most investors will be able to find at least one fund that suits their desired level of risk tolerance.
Guaranteed variable annuities explained by insurance brokers and insurance companies usually revolve around the tax-deferred status, lifetime income and death benefit. While investors can usually get at least two of these in other types of investments, guaranteed variable annuities are one of the few investment options that offer all three.
The Tax-Deferred Status of Guaranteed Variable Annuities Explained
Variable annuities grow tax-deferred. That means that all earnings compound without a tax liability until the money is taken out. Investors are always advised to consult with a qualified tax advisor prior to receiving distributions from a guaranteed variable annuity. In most cases, investors will be taxed at ordinary income tax rates rather than capital gains rates, which are lower. Still, over time, the amount of money that can accumulate in a variable annuity can far exceed other types of accounts because money is not deducted to pay taxes.
While some employers offer variable annuities as part of a defined contribution retirement plan, they may not be the best choice. Because all tax-qualified money grows tax-deferred, investors typically do not see any increased tax benefit by investing in variable annuities as part of a retirement savings plan. However, one very good choice is to purchase a variable annuity with the proceeds from a qualified plan. In other words, investors between the ages of 59 ½ and 70 ½ who are taking distributions from individual retirement accounts (IRAs) may want to consider buying a variable annuity. Once the taxes are paid on the distributions, money placed in the annuity will once again grow tax-deferred.
For retirees at risk of outliving their retirement savings, guaranteed variable annuities can provide at least some financial stability.
Death Benefits and Guaranteed Variable Annuities Explained
One of the benefits of a variable annuity that usually needs to be explained is the death benefit. Not all annuities offer this feature. In fact, the guarantee of a death benefit is a recent option provided by insurance companies to counter one of the negative aspects of annuities.
Prior to the guarantee of the death benefit, an investor who died before receiving any annuity distributions would forfeit the money to the insurance company. Even though he or she could transfer the risk of outliving his or her assets, the risk of premature death was placed solely on the annuity owner.
The guaranteed death benefit feature allows the annuity owner to name a beneficiary who will receive distributions if the annuity owner dies before payouts begin. While the amount that the beneficiary receives will vary among insurance companies and contract specifications, it is usually at least the amount that the owner has contributed. If he or she purchased the annuity for $100,000 and dies before receiving any of the premium back, the beneficiary will receive $100,000. Other types of contracts will specify that a beneficiary will receive the amount of the premium that has not been paid out. If the annuitant purchased the annuity for $100,000 but dies after having only received $50,000 in return, his or her beneficiary will receive the balance of $50,000.
For this reason, guaranteed variable annuities explained by qualified agents will almost always involve a discussion about estate planning. The death benefit allows families and businesses the ability to use a variable annuity in much the same way they would a life insurance policy. In some cases, investors are advised to purchase an annuity instead of a life insurance policy because of the tax-deferred growth.
Guaranteed Variable Annuities Explained in Terms of Lifetime Income
One of the most important features of guaranteed variable annuities is the promise of lifetime income. For investors with few assets, the prospect of guaranteed payments for life can present a suitable option. Most guaranteed variable annuities guarantee that even in a severe market downturn that the amount paid out each month will not drop below a certain level.
If the variable annuity is a deferred annuity, the payouts will begin at a future date as outlined in the contract. If the variable annuity is immediate, the payouts will begin within 12 months of the contract date. Some investors, especially those who have received a large amount of cash from the sale of property or an inheritance, will choose a variable annuity with the guarantee of lifetime income in order to provide as much income in retirement as possible.
Annuity owners can also choose to have a spouse or beneficiary receive payouts for life. Owners can also typically choose between receiving only the amount of their premiums back and receiving the premiums plus earnings. An annuity owner who chooses to receive payouts for life, or to have a spouse receive payouts for life, has chosen what is known as a "period uncertain" annuity. Because the number of payouts is uncertain, the amount of the payouts is usually less than those paid on a "period certain" annuity.
A period certain guaranteed variable annuity guarantees that payouts will be made for a set period of time. For example, a 20-year period certain contract will pay the annuitant or the beneficiary for 20 years.
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