What is a variable annuity?


Variable annuities are characterized by the option of varying the benefit and the rate of return. They are the best solution for people who have enough money to invest and are not afraid of taking on any investment risks.

Characteristics of Variable Annuities

  • The income payments of variable annuities vary according to the investment performance on the stock market.
  • The money that annuity owner is paying towards a variable annuity is used to buy accumulation units in a separate account during the period before retirement. Premiums are invested in certain portfolios of various investments that increase in value during inflation. Part of the premiums goes into sales charges and tax deductions. The accumulation units increase or decrease, depending on the investment performance.
  • Upon retirement, the accumulation units are converted into annuity units, the amount of which the annuity owner starts periodically receiving. In contrast to the accumulation units which can vary in number, the number of annuity units remains fixed during the payout period. However, the annuity payment will vary according to the value of an annuity unit.
  • Variable annuities usually provide a guaranteed death benefit. If the annuitant dies before retirement, the beneficiary will receive the higher of two amounts: either the value of the account at the time of death, or the amount invested in the annuity.
  • Some insurance companies pay enhanced death benefits on variable annuities. The value of the so-called rising-floor death benefits, for instance, can be periodically reset so that the return of the principal and the interest is guaranteed. In comparison, with stepped-up benefits, investment gains are periodically locked in, such as every five or every ten years. The third type of variable annuity death benefit - enhanced earning benefit - pays an extra amount to cover the federal income tax upon the annuitant's death.
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