Variable annuities are sold by insurance companies. This financial instrument gives investors another investment option when planning for retirement. Retirees can use annuities to bring in additional income during their retirement years. The process is easy to learn. For example, you will make a monthly payment to the insurance company. In return, the insurance company will pay you weekly, monthly, quarterly, or annually based on the terms of the annuity contract.
Keep in mind that there are fixed annuities and variable annuities. Fixed annuities are guaranteed payouts to the investor or policyholder. Variable annuities are different and more complicated because the monthly payment can change based on many factors. What are the factors that can affect variable annuities?
According to the University of Idaho, variable annuities have many extra costs and fees. It seems unreasonable to find out that an insurance company will charge so many fees. For example, there is typically a mortality and expense charge of 1.35 percent. Then, there is a charge if you withdraw the money before age 59 1/2. This fee may be 10 percent plus taxes and then you are taxed at the normal income tax rate. It is very important that you pay close attention to all your personal financial information if you invest in annuities.
There is also a fee for sub-accounts and other funds that may cost you .95 percent. There are more fees and one is called the surrender fee you have to pay if you leave the annuity within 8 years. Do not forget about the annual fee and the commission that is paid to the broker. All these factors do affect the returns on variable annuities because they increase and decrease the cash in the accounts.
If you decide to buy an annuity, make sure you read the prospectus. This document will have detailed information about which actions will affect your returns. Visit the United States Securities and Exchange Commission website to get tips about investing in variable annuities.
When you invest in variable annuities, you invest your money in financial products that may go down in value. The investments will have different returns and risk characteristics. Simply put, like all investments, you can lose money. Professor Vickie Bajtelsmit, a finance professor at the Colorado State University College of Business, says that, ” it is less expensive to buy the insurance products separately.”
There are many other factors that affect variable annuities returns such as the time period of the investment, the total dollar amount of the investment, and what type of investments are in the annuities. Finally, do not invest your money in to something that you do not understand.