Bank III Business III Financial III Mortgages III Bank Of America

A variable annuity is an annuity with exposure to investments. If a fixed annuity pays a fixed rate of return, a variable annuity pays a variable rate of return. Before making a final decision for or against a variable annuity, you should understand how they work.

The Variable in Variable Annuity

A variable annuity is similar to plain-vanilla fixed annuities. You get some of the same features like tax-deferral, guarantees, and potential for lifetime payouts. What makes the variable annuity unique is the investments inside the annuity. You’ll often have a choice of stock and bond mutual funds to put your money in.

This is where the term variable comes in (as in, “your returns will vary with the returns of the investments”). Fixed annuities offer a predetermined return. There’s no way of knowing for sure what a variable annuity will return.

Why Would One Use a Variable Annuity?

The first question to ask is if you should be using an annuity of any sort. Assuming you do, you need to pick between a fixed annuity and a variable annuity. There are some cases where you might pick the variable annuity. For example:

• You want the potential for more growth than a fixed annuity offers
• You can afford increased risk with your money
• You want some of the flexibility that newer variable annuity products offer

Fees in a Variable Annuity

There’s no such thing as a free lunch. You get some standard features, and you might add some bells and whistles (or “riders”), but there’s a cost. A variable annuity has the following costs:

• Mortality and Expense charges
• Administration charges
• Underlying investment charges
• Rider charges (if you select any optional riders)

Depending on the features of the annuity you’re looking at, these charges will vary. A basic annuity will have lower fees and expenses, and a fully loaded variable annuity with every possible option will be expensive.

At this point, I should point out that there is only one reason you should ever pay these charges: because you need to. I cannot overemphasize this. If you don’t need the benefits unique to a variable annuity, don’t use one. You can invest in mutual funds and pay a lot less. However, if you want the guarantees, for example, then the additional cost may be worth it.

Before You Buy a Variable Annuity

Before you buy a variable annuity you should make sure it’s the right thing for you. Know what you’re getting into. In particular find out why an advisor is recommending a variable annuity as opposed to mutual funds. Sometimes there’s a good reason, sometimes not.

Take the prospectus home and read it carefully. This is the best source of important information about a variable annuity. It should detail all of the expenses, riders, and surrender features of the contract. If you don’t know how the product works, ask somebody you trust.