What is the difference between a Variable Annuity and a Mutual Fund?
A variable annuity offers a range of investment options. The value of your investment as a variable annuity owner will vary depending on the performance of the investment option you choose. Investment option for a variable annuity are typically mutual funds that invest in stocks bonds and money markets.
Although variable annuities are typically invested in mutual funds, variable annuities differ from mutual funds in several important ways:
First, variable annuities that you receive periodic payments for the rest of your life (or for the life of your spouse or any other person you designate). This feature offers protection against the possibility that after you retire you will outlive your assets.
Second, variable annuities have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specific amount - typically at least the amount of your purchase payments. Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount.
Third, variable annuities are tax deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When you take your money out of a variable annuity, however, you will be taxed on the earnings or ordinary income tax rates rather than lower capital gains rates. In general, the benefits of the tax deferral outweigh the cost of a variable annuity only if you hold it as a long-term investment to meet retirement and other long-range goals.
Variable annuities are designated to be long term investments, to meet retirement and other long-range goals. Variable annuities are not suitable for meeting short-term goals because of substantial taxes and insurance company charges may apply if you would withdraw your money early. Variable annuities also involve investment risks just as mutual funds do.

Thought for the Week
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