Every day, people
encounter unforeseen circumstances – insurance products can help people prepare
for and protect against the unpredictability of the future. Investors who are
seeking the guarantees insurance offers, as well as growth opportunities for
their money may find variable annuities of interest.
Variable annuities can
be a viable option for long-term investors who have taken advantage of their
employer-sponsored retirement plans and are planning for retirement income.
Variable annuities offer investors a range of investment options with varying
levels of risk, professional management, tax deferral, a variety of income
payout options, and guaranteed death benefits.
“Taxing” Issues
One of the main
bones of contention for critics of variable annuities is the issue of taxation.
Income earnings from a variable annuity are taxed as ordinary income, rather
than as long-term capital gains.
However, because
variable annuities are designed to help investors prepare for retirement, funds
have the potential to grow on a tax-deferred basis. Therefore, any investment
gain will accumulate free of current income tax and will be reinvested, which
can have a significant, favorable effect on the growth of your funds over the
long term.
Variable annuities
offer a variety of investment options too. Based on your time horizon and risk
tolerance, you can allocate your money to professionally managed subaccounts
that invest in stocks, bonds, and fixed-interest instruments.
The value of your
annuity will fluctuate based on your payments and the performance of the
underlying subaccounts. With a variable annuity, you may transfer funds between
investment options free of tax, although company charges may apply. This
favorable tax treatment can help you manage your money in the best interest of
your retirement without worrying about the current tax implications of capital
gains.
Unless you are
investing in an annuity through a qualified retirement plan, your payments will
be made with after-tax dollars and are not subject to contribution limits or
income restrictions. Annuities that are part of a qualified retirement plan
offer no additional tax deferral benefits.
The “Benefit” of Death
Benefits
Investors with
their sights set on retirement often factor their portfolios into their estate
plans, and variable annuities offer guaranteed death benefits (guarantees are
based on the claims-paying ability of the issuer). In the event an annuitant
dies before receiving annuity payouts, the chosen beneficiary(ies) will receive
the greater of the value of the account or the amount invested.
Some variable
annuities offer an additional feature – a “stepped-up” death benefit – which
secures investment gains on a set schedule and guarantees a death benefit equal
to the stepped-up amount. There is generally an extra annual fee for this
benefit.
For illustrative
purposes, consider the following hypothetical example. Suppose Laura Reynolds
purchases a variable annuity with an initial lump-sum payment of $50,000. In
five years, her annuity is valued at $75,000 and the death benefit is
stepped-up and locks in this gain. In ten years, it is valued at $100,000, when
the death benefit is stepped-up again. Over the next two years, the economy
struggles, and Laura’s annuity declines in value to $60,000. If Laura were to
die at this time, her chosen beneficiary would receive the annuity’s stepped-up
value of $100,000.
In addition to
favorable tax treatment and guaranteed death benefits, variable annuities can offer
investors a variety of payout options, including potential income for life.
With current trends indicating that individuals will be increasingly
responsible for funding their own retirement, variable annuities provide
investors with an opportunity to build and preserve wealth.
Important Disclaimers
The principal value and rate of return in a variable annuity will
fluctuate due to market conditions. Therefore, at any point in time, the value
of the annuity contract may be worth more or less than the owner’s actual
investment in the contract. Guarantees are based on the claims-paying ability
of the issuing company.
