Variable Annuity
What Does Variable Annuity Mean?
A variable annuity is an insurance contract that allows the policyholder to choose where their payments will be invested from a list of options provided by the insurer. While the contract guarantees a minimum payment, the remaining amount the policyholder receives depends on the performance of the selected investments.
Insuranceopedia Explains Variable Annuity
A variable annuity is considered a popular retirement plan by many due to its provision of a death benefit and income after retirement.
The ability to choose where the insurance money is invested makes a variable annuity appealing to some investors. If the chosen investments perform well, the policy can provide significant returns for the insured.
One advantage is that the money invested in options such as stocks is tax-deferred. The insured is only taxed when they begin receiving payments from the insurer. Additionally, the policyholder can change investment options while the policy is active.
However, the primary disadvantage is that if the chosen investments underperform, the payments to the insured will be reduced accordingly. Tax deferrals also cease once the insured starts receiving payments. Furthermore, capital gains from the investments are subject to taxation.
Another drawback of variable annuities is the numerous charges and fees. For example, a surrender charge may apply, where a percentage of any withdrawal goes to the insurer. The insured is also responsible for paying maintenance fees for the policy, and additional charges may apply for any extra benefits added to the policy.
