What if there were a financial tool that offers growth potential, tax-deferred accumulation, a death benefit for your loved ones, and possibly even guaranteed lifetime income? That tool does exist in the form of a variable annuity.
Variable annuities are contracts offered by insurance companies. They are deferred annuities, which means your contributions aren’t annuitized and converted into income right away. Instead, you have the opportunity to grow your funds over time and possibly even create a guaranteed lifetime income stream in the future.
A variable annuity isn’t right for everyone, but they can have strong benefits in the right situation. Below is an overview of some of the most appealing features of variable annuities and how they could benefit you:
The primary difference between variable annuities and other types of deferred annuities is the way in which you funds accumulate inside the policy. In other types of annuities, your contract value grows through the accumulation of interest. In a variable annuity, your growth comes from market returns.
Variable annuities offer a range of “subaccounts,” which are similar to mutual funds. Most annuities have a broad menu of options spanning a variety of asset classes. That allows you to build the allocation that best meets your needs, goals, and risk tolerance. Many variable annuities also offer models that are professionally managed.
Your contract value is directly tied to the performance of your subaccounts. If your investment choices increase in value, so too will your annuity value. On the other hand, your contract value can go down if your subaccounts perform poorly.
A variable annuity may not be a suitable choice for those who want to avoid market risk. However, it could be an attractive option if you can tolerate some risk and are looking for more growth potential than what is offered by more conservative options.
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Like other annuities, variable annuities are tax-deferred vehicles. That means you don’t pay taxes on growth as long as the funds stay inside the contract. That tax deferral may help your funds compound faster than they would in a taxable vehicle.
Just like other tax-deferred vehicles, though, you can’t take early distributions from a variable annuity. If you take a withdrawal before age 59 ½, you may face a 10 percent penalty.
Optional Features and Benefits
Most variable annuities offer a range of optional features and benefits, known as “riders.” Some of these features have an additional fee, but others may not. Some of the most common optional riders include:
Guaranteed Minimum Withdrawal Benefit
Guaranteed income is one of the primary reasons why many people choose to use an annuity as part of their retirement strategy. Many variable annuities offer guaranteed income through something known as a guaranteed minimum withdrawal benefit.
With this benefit, you are allowed to withdraw a certain amount, like 5 percent of the account value, every year. As long as your withdrawals never exceed the allowed value, the income is guaranteed for life, no matter what happens to your investment performance. Even if your account value declines, you still get the withdrawals as long as you live.
Nursing Home or Advanced Illness Waiver
Like other deferred annuities, variable annuities usually have a surrender schedule. This is a defined period of time in which you could face a penalty if you surrender your contract or withdraw a substantial amount.
Life can be unpredictable, though. An emergency could arise that forces you to take money from your contract. Many variable annuities offer a nursing home or advanced illness waiver that allows you to surrender your contract without penalty to pay for long-term care or medical costs. That extra liquidity could be helpful if you face serious illness or injury.
Death Benefit Enhancements
All deferred annuities have a death benefit available to your beneficiaries after you pass away. However, variable annuities sometimes offer optional benefits to enhance and increase the death benefit amount. Some options may add an additional amount onto the death benefit. Others may increase the death benefit by a certain percentage each year.
Death benefit enhancements vary by contract, and they usually come with an additional fee. Be sure to examine the costs and benefits closely before selecting additional riders.
Curious about whether a variable annuity fits into your retirement strategy? Let’s talk about it. Contact us today at America’s Annuity. We can help you analyze your needs and develop a plan.
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