How Do Variable Annuities Work?A variable annuity has two phases 1) An Accumulation Phase and 2) A Payout Phase. This week our discussion will cover the Accumulation Phase and next week the Payout …
How Do Variable Annuities Work?
A variable annuity has two phases 1) An Accumulation Phase and 2) A Payout Phase. This week our discussion will cover the Accumulation Phase and next week the Payout Phase.
1) The Accumulation Phase
During the accumulation phase, you make purchase payments, which you can allot to a number of investment options. For example, you could designate 40% of your purchase payments to a bond fund, 40% to a U.S. stock fund, and 20% to an international stock fund. The money you have allocated to each mutual fund investment option will increase or decrease overtime depending on the fund’s performance. In addition, variable annuities often allow you to allocate part of your purchase payments to a fixed account. A fixed account, unlike the mutual fund, pays a fixed rate of interest. The insurance company may reset this interest rate periodically, but it will usually provide a guaranteed minimum (e.g., 3% per year.)
Your most important source of information about a variable annuity’s investment options is the prospectus. Request the prospectuses for the mutual fund investment options. Read them carefully before you allocate your purchase payments among the investment options offered. You should consider a variety of factors with respect to each fund option including the fund’s investment objectives and policies management fees and other expenses that the fund charges, the risks, and the volatility of the fund and whether the fund contributes to the diversification of your overall investment portfolio.
During the accumulation phase, you can typically transfer your money from one investment option to another without paying tax on your investment income and gains, although you may be charged by the insurance company for transfers. However, if you withdraw the money from your account during the early years of the accumulation phase you may have to pay “surrender charges.” In addition, you may have to pay a 10% federal tax penalty if you withdraw money before the age of 59 ½.
Thought for the Week
“The greatness of this or any country may still be measured by the number of people trying to get IN vs. the number of people trying to get OUT.”
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