How Variable and Fixed Annuities Work

Written By: Owen R. Matthews on February 11, 2010 No Comment

An individual may purchase an annuity from an insurance company by providing them with a series of payments into the account. In return the account is able to earn tax-free growth for a period of time. In the case of a fixed account annuity, this rate may be fixed for the duration of a specified period.

In a variable annuity, the account value fluctuates based on the performance of the portfolio. The portfolio of the annuity can be shifted between fixed investments or various common stock portfolios or separate accounts.

If the individual elected the life annuity option, then the payments from the annuity may continue for the duration of their life.

There are a number of different options that determine the eventual size of the payments each period. The account value, distribution length, number of beneficiaries, and interest rate all determine the size of the payment.

If you select the right options and riders on the annuity contract, you may even be able to specify that the payments continue after you pass away. The payments may continue to other members of your family, but these additions often come in the form of higher premium payments.

It is important that you careful evaluate each of the different characteristics and expenses of a variable annuity account before you commit to investing. Your contract data will have this information and will inform you of anything that you need to know before investing. If something doesn’t seem right with the contract, make sure that you have it sufficiently answered before you commit to purchase the annuity.

One of the beneficial features of an annuity contract is that the account funds are not taxable until they are withdrawn from the account. This allows you tax-deferred growth throughout the duration of the accumulation period.

The part of the annuity that is makes it an insurance product is partly due to the guaranteed monthly income payments for the duration of your life (or specified period). This can significantly lower the stress of allocating retirement income. Additionally, if you should happen to die before the contract expires; your heirs may be able to receive the remainder of the account up to the value of the premiums paid in.

It is important to understand that certain actions outside of the design of your account may result in penalties, additional charges, or penalties that can affect the account value. Be certain that you have read the prospectus thoroughly and understand the ins and outs of the annuity contract. You do not want to be caught unawares of certain provisions and chargebacks.

The world of fixed rate annuities can be rather complicated. To get more details on this type of investment, take a minute to check out Luke Murray at The Fixed Annuity Guide.