Understanding Variable Annuities and its Benefits

For the financial newbie’s, it may get a little tedious trying to understand what financial terms mean, and indeed what are the nitty gritties of various financial products. Let us start by understanding a financial product called a ‘Variable Annuity’, a first step for just about any investor.

What are Variable Annuities?

These financial products are annuities that have a pay out performance that depends on the performance of the assets within the annuity fund. These annuities act as a supplementary retirement programs as they are ideal long-term savings vehicles for providing income in the twilight years.

Variable Annuity, Annuities

Payouts for this annuity, as mentioned earlier, are directly proportional to the performance of its internal investments, which are usually invested in certain proportions in both equity as well as fixed income assets.

Can it provide me with Retirement Payments All The Way Through Till I Die?

While numerous Annuities have such kind of insurance guarantees, these kind of guarantees often do not apply to variable annuities. This is simply because the performance of this annuity cannot be accurately predicted as its returns depend on the returns of its underlying investments.

How Can I Gain The Maximum Information on the Annuity That I have Selected?

A Variable Annuity is sold only on the basis of a prospectus. A good Financial Advisor can help you in securing all the prospectuses for the products that interest you. As an investor, it is imperative that you read through the entire prospectus and understand the pros and cons of your investment. The prospectus contains all information on the product, such as the fund’s objectives, its risks, its expenses and additional charges.

What Are the Other Salient Features That I Should Be Aware Of?

  • A variable annuity is a contract between 2 parties, namely you and your insurer, wherein the latter agrees to make periodic payments to you. The payment may either begin immediately or may begin at some date in the future. The contract can be purchased by making a single payment or by makings several smaller payments.
  • Variable annuities give you the following additional benefits:
  1. Periodic Payments.
  2. Death Benefit.
  3. Tax Deferred Benefits, etc.
  • These products work in 2 phases. Ask your financial expert to guide you through the annuity’s accumulation phase and payout phase in detail. Sit with him and your calculator if you must, but make sure you understand everything before you make the purchase.
  • There are certain charges associated with these annuities. Make sure that you understand the following charges in detail before you decide on your policy:
  1. Surrender charges – charged if you withdraw your money before a certain period of time.
  2. Mortality and expense risk charges – this is a percentage charge that compensates the insurance company for its assumed insurance risk.
  3. Administrative fees.
  4. Underlying fund expenses – indirect fees that are imposed by the underlying assets.
  5. Fees for special / additional features.

For any additional help in understanding your annuity contract or the charges associated with it, talk to your advisor. An advisor is the most capable person to help you understand other aspects of your policies too, such as endowment, nomination, bonus credits and surrender periods. Invest wisely, for it is your hard earned money!

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