Variable Annuity

What are Variable Annuities?

Variable Annuities are a contract between you and your insurance company, under which that company agrees to make periodic payments to you. These payments can be immediate and begin now or be deferred and payout at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. Annuities are sometimes referred to as reverse life insurance. Life Insurance is coverage for when you die, and an annuity is coverage you cannot outlive and pays you while you are alive.

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 options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three. Direct Insurances will connect you with a licensed annuities specialist to help you make all of the important decisions about variable annuities.

Although variable annuities are typically invested in mutual funds, variable annuities differ from mutual funds in several important ways:

You receive periodic payments for the rest of your life (or the life of the beneficiary). This feature offers protection against the possibility that, after you retire, you will outlive your assets.
They have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified 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.
Tax-deferred - You pay no taxes on the income and investment gains from your annuity until you withdraw your money.

How Variable Annuities Work

During the accumulation phase, you make purchase payments, which you can split up between a number of investment options. For example, you could designate 20% of your purchase payments to a bond fund, 40% to a U.S. stock fund, and 40% to an international stock fund. During this 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. If you withdraw money from this account during this phase, you may have to pay surrender charges. You may also have to pay a 10% federal tax penalty if you withdraw money before you turn 59½.

Your most important source of information about a variable annuities 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 volatility of the fund, and whether the fund contributes to the diversification of your overall investment portfolio.

At the beginning of the payout phase, you may receive your purchase payments plus investment income and gains (if any) as a lump-sum payment, or you may choose to receive them as a stream of payments at regular intervals (typically monthly). Under most annuity contracts, you can choose to have your annuity payments last for a period that you set (20 years) or for an indefinite period (your lifetime or the lifetime of you and your beneficiary). The amount of each periodic payment will depend, some, on the time period that you select for receiving payments. Be aware that some annuities do not allow you to withdraw money from your account once you have started receiving regular annuity payments.

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