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Millionaire Now! by Larry NusbaumThis blog is based on the organizational principles found in my new book, "Millionaire Now! - A Financial Toolbox with Seven Steps to Wealth". |
The mystery behind variable annuities & are they a good investment?
A variable annuity is a contract issued by an insurance company that allows you to invest in your choice of investment options advised by well-known mutual fund companies. All growth is tax-deferred and when you are ready, you can choose from several income options, including ones that will guarantee income payments as long as you live. Annuities also provide extra peace of mind through their guaranteed death benefit.*
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Why Should I Consider a Variable Annuity ?
Although variable annuities involve investment risk, including possible loss of principal, they do offer several valuable advantages:
1. Tax deferred growth. Annuities are tax-deferred, which means your money can grow faster than it would in a taxable investment because any gains that would have been lost to taxes each year remain in your annuity to generate even more earnings. Plus, you don't pay taxes until you withdraw the money, typically at retirement when you may be in a lower income tax bracket.** Keep in mind, the higher your tax rate, the more impact tax deferral can have on your annuity value.
2. Investment convenience and flexibility. When you put your money in a variable annuity, you can choose from more than 35 investment options managed by well-known mutual fund company advisors—all within the convenience of one product. Transfers between options (and even between fund families) are quick, convenient and free of tax consequences. This feature is important when economic conditions or your personal needs or strategies change. It is also valuable when you implement long-term asset allocation or rebalancing strategies.
3. Guaranteed death benefit. If you die while accumulating money in your annuity, your heirs will receive at least the amount you originally invested. For example, if purchased an annuity for $500,000 and its value had declined to $400,000 at the time of your death, your beneficiary is assured of receiving the $500,000 (less any withdrawals).* Of course, if your annuity has grown to $600,000 by the time of your death, your heirs will receive the higher amount.
4. Unlimited contributions. Unlike 401(k)s, IRAs or private pension plans, an annuity generally does not limit the amount you can invest so you have an excellent opportunity to protect more of your money from taxes.
5. Income for life. When you are ready, you can turn your annuity into a regular stream of income that is guaranteed to last as long as you live.*
*Guaranteed death benefits and guaranteed lifetime annuity payments are subject to the claims-paying ability of the insurance company.
** A 10% penalty may apply to withdrawals before age 59 1/2.
Two-Phased Investment
An annuity is a contract issued by an insurance company which enables you set aside money and have to grow on a tax-deferred basis. When you are ready to retire, you can withdraw money as needed, or you can turn the value of your annuity into a regular income stream that is guaranteed by the issuing insurance company to last the rest of your life, regardless of how long you live.
1. Accumulation Phase This is the period during which your annuity has the opportunity to grow on a tax-deferred basis which is generally referred to as the accumulation phase. If the annuitant dies during this phase, the death benefit paid to the beneficiaries.
2. Payout (or Income) Phase This is the period after you annuitize your contract. At this point, you will begin to receive regular income payments comprised of the principal you've paid in, and any earnings you've accumulated over the years. You can choose from several payout options each with its own advantages and disadvantages. Keep in mind, the option you choose, your age (and the age of any joint annuitant) and your premium will determine how much income you will receive and how long that income will last.
How Much is a Variable Annuity?
Generally, there are three types of fees for a variable annuity: an insurance expense, investment option expenses and a surrender charge. Some companies may also charge other asset based fees, additional charges for additional benefits, and additional administrative fees. Overall, the lower the costs in an annuity, the better for you. When less of your money goes toward fees and expenses, more is invested and working for you. Read on to learn more about variable annuity fees.
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