Variable Annuities 4 Advantages in 1 Product

What is a variable annuity?

Unlike many other financial instruments, variable annuities bring the power of investing (choice and flexibility and tax deferral) and insurance (income guarantees and legacy protection) together in one unique retirement product.

Let’s take a look at each advantage offered by a variable annuity.

Advantage #1: Choice and Flexibility

When it comes to investing, one thing just about everyone can agree on is the importance of diversification to help avoid the risk of losing money. Most variable annuities offer a range of investment options across a variety of asset classes, strategies, styles and sectors. Spreading your money among investments can help reduce your risk in down markets.

Variable annuities also allow you to transfer money among investment options without sales or withdrawal charges.

Advantage #2: Annuity Tax Benefits

With a variable annuity, any growth in your account is tax deferred until you begin taking withdrawals at a later date (when you may be in a lower tax bracket). Thus, all the money that would have been paid annually in taxes stays in the account with the opportunity to grow until it is withdrawn. You also have the added flexibility to rebalance or strategically move money within your investments without incurring annual taxes.

A variable annuity also offers you the flexibility to rebalance or strategically move money within your investments without having to pay year-end taxes.

It's important to know that you can only take advantage of tax deferral if you buy your annuity with money from outside of “qualified” retirement accounts, such as 401(k)s, 403(b)s and IRAs (because these are tax-deferred already). Many people choose to do so anyway, because they want to take advantage of the annuity's other features and benefits, including death benefit options, range of investments and guaranteed income payout options.

If you are considering purchasing an annuity with funds from a qualified account, it's best to speak with your tax advisor.

Advantage #3: Income Guarantees

Annuities provide two ways to guarantee your retirement income:

1. Annuitization:

   When you’re ready to start taking income, you can annuitize, which means you would turn over control of the money in the account to the insurance company in return for a regular stream of income payments in retirement.
   
   Those payments would continue either for life, for a specified period of time (often 10, 20 or 30 years), or for a combination of the two (eg. life with 10 years). When you pass away, the insurance company would fulfill any remaining payment obligations to your beneficiaries for the elected time period, and keep any remaining money.
    

2. Optional Lifetime Income Guarantees:

   In addition to annuitization, today’s annuities offer living benefits, for an additional fee, that function in a similar way to annuitization, but with more flexibility. These benefits provide income guarantees - including lifetime income - that essentially insure your future income, without giving up total control of your money.
   
   When you purchase a variable annuity with an income guarantee, your future income level can be protected even if your account’s investments perform poorly. In addition, some living benefits offer guaranteed income growth as well as the opportunity to capture gains when the market goes up. Once you begin taking income you can withdraw up to a specific amount each year as a guaranteed income stream for life, subject to the limitations outlined in your contract.
   
   Typically, these optional lifetime income benefits are available for an additional fee, but also can be built into the annuity.

Advantage #4: Legacy Protection

Most annuities today offer a standard death benefit to help provide a legacy for your loved ones. It typically works like this: After the owner dies, the beneficiaries will receive at least what the owner has paid into the annuity, minus any withdrawals OR the current account value of the annuity, whichever is greater.

This death benefit is generally built into the variable annuity at no extra cost. Some annuities do offer enhanced death benefits for an additional fee.