What Is a Variable Annuity Explained - Definition, Pros

A variable annuity is an insurance contact, under which the insurer agrees to make periodic payments to you in the future. You can purchase an annuity contract by making either one single purchase payment or a series of purchase payments to the insurer.

1. What are the pros and cons of a variable annuity?
2. What are the advantages of a variable annuity?
3. What are the advantages and disadvantages of annuities?
4. What is a variable annuity and how does it work?
5. Can you lose all your money in a variable annuity?
6. What are the downside of annuities?
7. Why you should never buy an annuity?
8. Why variable annuities are bad?
9. When would you use a variable annuity?

What are the pros and cons of a variable annuity?

The Advantages of Variable Annuities

• Tax Deferral. Like all other forms of annuities, variable annuities grow from year to year on a tax-deferred basis. ...
• Avoidance of Probate. ...
• Protection from Creditors. ...
• Initial Bonuses and High Guaranteed Rates. ...
• Poor Cost Basis. ...
• Poor Tax Treatment. ...
• High Fees.

What are the advantages of a variable annuity?

Variable annuities offer a unique combination of insurance and investment benefits: choice and flexibility. tax deferral. the opportunity for guaranteed lifetime income.

What are the advantages and disadvantages of annuities?

Advantages and disadvantages of annuities

• You have a guaranteed regular income for the rest of your life.
• It's tax paid.
• It takes the pressure off you by having someone else look after your investments; you can now sit back and enjoy your retirement.
• You may live a long time and make on the deal, at the expense of the insurance company.

What is a variable annuity and how does it work?

A variable annuity is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose. Compare that to a fixed annuity, which provides a guaranteed payout.

Can you lose all your money in a variable annuity?

A variable annuity starts with you making payments to an insurance company and choosing funds to invest your money in. ... Because of the volatility any investment can experience, the value of your account can rise and fall with the market. You may lose money, but you might also earn quite a bit.

What are the downside of annuities?

Annuity distributions are taxed as ordinary income, which is a higher rate than that for the capital gains you get from other retirement accounts. Annuities charge a hefty 10% early withdrawal fee if you take money out before age 59½.

Why you should never buy an annuity?

You should not buy an annuity if Social Security or pension benefits cover all of your regular expenses, you're in below average health, or you are seeking high risk in your investments.

Why variable annuities are bad?

Why Are Variable Annuities Generally Poor Investment Options? The first reason is cost. According to Vanguard, the industry average annual cost of a variable annuity is 2.24% of the assets of the fund. You can buy a diversified portfolio of low cost index mutual funds for approximately .

When would you use a variable annuity?

Variable annuities could help you meet retirement and other long-range goals. Variable annuities are not suitable for meeting short-term goals. Substantial taxes and surrender charges may apply if you withdraw your money early. Variable annuities involve investment risks just like mutual funds do.