There are a host of financial products that you may wish to invest in. General life insurance policies or term life insurance, provident funds or retirement schemes are quite common. People are being urged to invest more so their post retirement days can be without any financial constraint. Investment is the key to effective financial planning. Savings alone cannot sustain the livelihood for a very long time. There has to be an investment that can have returns which will outlive the investor.
The Pros of a Variable Annuity
1. Variable annuity offers a way to get paid or to get money on an ongoing basis for as long as one lives. This allows the returns to outlive the person and obviously there aren’t many ways to have assets outliving the investor.
2. Variable annuity is not taxable unless you withdraw the money. If you invest at the age of thirty and finish investing at the age of forty, the funds accumulated till the time you withdraw will not incur any taxes. If you start withdrawing the funds or your returns at the age of sixty, then you have built a capital for twenty years or more without paying any taxes.
3. Variable annuity often has an insurance policy within its ambit that offers death benefit. There is a lump sum payment that a beneficiary gets at the event of the investor’s death. This is other than the returns that the spouse would keep getting. One can also choose to cash out entirely along with the death benefit if the investor doesn’t have a spouse alive and thus the beneficiary can get the returns on the investment.
The Cons of a Variable Annuity
1. Variable annuity can be quite expensive. Many people don’t realize that there are many fees and different types of charges to be paid. There are administrative costs, contract charges, cost of insurance, expenses for underlying funds and expense risk charges among others. All these charges can mount up quite a steep bill to foot. The annual costs or fees for variable annuity can be as high as 4% of the amount being invested. Also, the penalties for early withdrawals or late payments can also be hefty in some cases. There are many ways to make investments that are far cheaper or much more affordable than variable annuity. Some products do offer as much returns as variable annuity but with much less headache, cost and complications.
2. Choosing variable annuity is also very difficult. Even those who have had investment portfolios for a long time can struggle to figure out the right option. Choosing the right institution or insurance would also be very important. It is said that verbal annuity is just as good or as bad as the provider of the same.
3. Paying taxes at a later date when you would actually withdraw your funds is good as you would be paying income tax and not capital gains tax. However, if your fund accumulation is as steep or substantial as capital gains, then the tax you would pay will also be hefty. You may have to part with substantial chunks of your returns in taxes. Hence, if you are thinking of variable annuity as a way to save on taxes, then it is not a wise move. There are many other more effective and cheap ways to save on taxes.
Understanding Variable Annuity
Variable annuity is an aggressively marketed investment option or financial product. But it is not simple. There are many complexities that have to be understood before taking the plunge and investing in variable annuity. The reality is that most people don’t have a very lucid understanding of how variable annuity works. That it is a form of mutual fund or the money invested is actually routed to investments which are exposed to market risk is often overlooked or not given priority to. Many people, especially those who are not seasoned investors, consider variable annuity as a form of insurance. It is not. There are similarities and the dissimilarities are what you should be conscious of.
In a variable annuity, an investor keeps paying a certain amount of money over a specified period of time or pays a lump sum amount as a onetime payment for the entire product. This option or product may be offered by conventional insurance companies or by financial institutions, including banks. While the investment is made on a recurring basis or at once, the insurer or the financial institution will reinvest that money into mutual funds, stocks or bonds and other money market instruments. The returns on the investment would be accumulated and after a specified time, the insurer or financial institution would make monthly payments to the investor for his or her entire life. If the investor dies then his or her spouse would be eligible to get the monthly returns for life.