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What is a variable annuity?
It is annuity contract that allows you to allocate your premium among a number of investment portfolios, consisting of any mixture of stocks, fixed income instruments or money market accounts. Your variable annuity contract value will reflect the performance of the underlying investments held in those portfolios, minus the contract expenses, and is subject to market risk, including the potential loss of the principal invested.
A variable annuity is a personal retirement account that brings together the best features of managed investments and insurance. Your money accumulates tax-deferred in professionally managed funds until withdrawn. And, you can feel safer knowing your beneficiaries will receive a Guaranteed Death Benefit from your variable annuity if you die when the market is down. Death Benefits in variable annuity plans are subject to the claims paying ability of the issuing.
A variable annuity is basically a mutual fund inside a tax-deferred insurance wrapper. Investments are made in mutual funds or mutual-fund-type accounts offered by the particular annuity. The investments are not tax deductible since usually variable annuities are sold outside tax-deferred accounts as they already have a tax-deferred component. Then the earnings grow tax deferred until they're withdrawn, usually at retirement. Payouts from variable annuities can be guaranteed for life, regardless of how much the account actually earns, and there is a death benefit guarantee, as well.
Variable annuity is designed to be a long-term investment. Most Variable annuity plans are not suitable for meeting short-term needs (two years or less.) Variable annuity plans also involves investment risks (as mutual funds). You may want to consider an indexed annuity instead for good upside potential with no market risks. Click here for more on indexed annuities.
How variable annuity plans work
Variable annuity has two phases: the accumulation phase of Variable annuity and the distribution phase of variable annuity :
 the accumulation phase of Variable annuity is when you make purchase payments, which you can allocate to a number of investment options. During the accumulation phase of variable annuity, you are basically investing money in this variable annuity. Variable annuity often allows you to allocate part of your purchase payments to a fixed account.
the distribution phase of variable annuity is when you decide how you want to withdraw your money.
During the distribution phase of variable annuity, you withdraw your money as you want:
variable annuity > a lump sum withdrawal
variable annuity > a regular income payment schedule
variable annuity > a guaranteed income plans.
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Which Annuity to choose?
CD Annuity - The most comparable to bank CD's. Your get a predictable rate of return.
Fixed Rate Annuity - This fixed annuity will usually offer a fixed rate for a short to medium period of time at sometimes a lower guaranteed rate.
Indexed Annuity - This annuity is one of the most popular today. This annuity allows you to receive higher returns than with many fixed rate annuities. This annuity is ideal for individuals who want to take advantage of equity fluctuations without the downside risk.
Immediate Income Annuity - This annuity provides a guaranteed stream of income for a period of time. This annuity is most popular with retirees. The income of this annuity is for life or a selected period.
Interest Bonus Annuity - This annuity offers a substantial first year bonus. This annuity is for people who experienced investment losses and are trying to recoup these losses through interest bonus annuity. This annuity tends to run for longer periods than a CD Annuity, a Fixed Rate Annuity, Indexed Annuity or an Immediate Income Annuity.
Variable Annuity – Allows for greater upside potential but usually involves higher risks to your principal
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