Variable Annuities

A Variable Annuity is a retirement vehicle offered by an insurance company which is made up of sub-accounts of marketable securities. The main advantage to an annuity is that earnings grow tax-deferred until withdrawn, usually at retirement. Annuities also have a death benefit feature which allows money to flow to the beneficiary without going through probate. Some annuities allow riders which may cause the death benefit to increase year-over-year or at the time of death regardless of the underlying investment accounts.

The period in which the investor is building up for retirement is called the accumulation phase. During the accumulation phase, the investor may contribute more money, though it is not mandatory. It is during this phase that there is a death benefit. The money within the annuity is invested in sub-accounts. There are usually many different styles of sub-accounts to choose from which may include managed or unmanaged portfolios of stocks and bonds.

Annuities were originally designed to mimic pensions by providing income guarantees in retirement. Historically this was done through investors requesting to annuitize their account. Annuitizing means that the insurance company will exchange the cash value of the underlying investment for a guaranteed income stream for a term of time (usually life or longer). Once annuitized, the death benefit generally no longer exists. The guarantees are backed by the insurance company.

Since the mid-1990s annuities have offered living benefits. Living benefits are usually guarantees of income during retirement which can be utilized without having to annuitize the contract. This allows the investor to have a guaranteed income stream while retaining the death benefit feature and access to the underlying value of the assets. Distributions from the annuity greater than the amount guaranteed by the living benefit can in some cases incur additional fees and a potential reduction of the income guarantee.

Annuity distributions prior to age 59 1/2 generally incur ordinary income taxes plus a 10% penalty just like Traditional IRAs. In contrast to IRAs, annuities have no required minimum distributions.

You should consider the investment objectives, risks, charges and expenses of an investment carefully before investing. The prospectus contains this and other important information. Prospectuses for both the variable annuity contract and the underlying funds are available from your financial professional. Please read all prospectus carefully before investing or sending money. Guarantees are based on the claims-paying ability of the issuer and do not protect against market fluctuation. 

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