Very few financial products have generated as much controversy as variable annuities. Many brokers and planners view them as indispensable retꩲirement planning tools, while other financial experts warn consumers to avoid them at all costs♓.

There is no black-and-white answer to this issue. You need to understand the advantages and disadvantages of these in🍌vestments before making a decision.

How Variable Annuities Work

A variable annuity is a type of retirement account. The owner of the account has an investment fund tha𒁏t is intended, after retirement, to provide a regular monthly income in an amount that is subject to the fluctuations in the value of the investment🎃s selected for the account.

Variable annuities probably rank second only to 澳洲幸运5开奖号码历史查询:variable life insurance in terms of complexity. They resemble their 澳洲幸运5开奖号码历史查询:fixed annuity and 澳洲幸运5开奖号码历史查询:indexed annuity cousins in that they are issued as contracts that grow on a 澳洲幸运5开奖号码历史查询:tax-deferred basis regardless of whether they are placed inside an 澳洲幸运5开奖号码历史查询:individual retirement account (IRA) or another tax-deferred retirement plan.

There is a 10% 澳洲幸运5开奖号码历史查询:early withdrawal penalty for distributions that are taken before the contract owner is 59½, with certain exceptions for death, disability, or other factors.

However, variable contracts are unique in that they offer a preselected group of 澳洲幸运5开奖号码历史查询:mutual fund subaccounts into which you allocate the premiums you pay. The values of the funds rise and fall with the markets, with no guarantee of 澳洲幸运5开奖号码历史查询:principal.

Most variable products also contain 澳洲幸运5开奖号码历史查询:living and death benefit riders that guaranteꦰe either a minimum account value or a stream of income (see below).

Nevertheless, even this information is not enough to allow you to make an educated buying deciᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚsion. You also need to know the pros and cons of these unique products.

The Advantages of Variable Annuities

Var🍷iable annuities offer a package of benefits. Here are their main selling points.

Unlimited Contributions

As mentioned previously, there is no limit to the ✃amount of money that can be placed inside a variable annuity. For this reaso🔜n, they are popular with wealthy investors who are looking for tax shelters. (Most carriers impose a limit for initial purchases.)

Tax Deferral

Like all other forms of annuities, variable annuities grow from year to year on a tax-deferred basis. The distributions are taxable in the year that they are made.

Insurance Protection

Most variable contracts today offer an array of living and death benefit riders that promise a guara⛄nteed streamℱ of income or a minimum account value.

The living benefit riders pay out a guaranteed stream of income that is based upon a hypothetical guaranteed rate of growth from the subaccounts. You will still get this payout even if theꦑ subaccounts fall short of this rate of growth.♔

The typical death benefit rider promises the beneficiary the largest of three factors: the current contract value, its highest value on the date of the contract anniversary, or a value based on a guaranteed hypothetical rate of growth.

Potential for Superior Returns

People who put their mo💯ney in stock subaccounts and leave it ther🦋e for 20 years or more will probably see a higher return on their investment than can be had from any other type of annuity.

Most variable contracts also offer basic money management services, such as periodic 澳洲幸运5开奖号码历史查询:rebalancing.

The fixed accounts that are available🐎 in many variable contracts are often higher than the rates offered by comparable fixed products.

Avoidance of Probate

As with fixed and indexed annuities, variable annuity contracts are unconditionally exempt from probate. That allows the beneficiaries to get their money quickly.

Protection from Creditors

Although this benefit varies somewhat by state, many states mandate that money placed inside variable or other types of annuity contracts cannot be attached by creditors. Florida, for example, offers such protection.

Initial Bonuses and High Guaranteed Rates

Many variable annuity contracts will pay an instant bonus on money that is paid into the contract, or they may offer a 澳洲幸运5开奖号码历史查询:dollar-cost averaging program that pays a high fixed rate on the initial balance and then moves the money into the subaccounts of your choice over a set period of time, such as six or 12 months.

The Disadvantages of Variable Annuities

Despite their versatility, variable annuities are not all things to all p൩eople and do have some real limita𒁃tions.

Poor Cost Basis

Unlike stocks and other securities, the 澳洲幸运5开奖号码历史查询:cost basis of variable annuities does not step up when they are inherited. Beneficiaries will pay tax on the entire contract value that has grown from the date of the initial purchase.

Poor Tax Treatment

Although variable contracts grow tax-deferred until retirement, they impose the same 10% early withdrawal penalty as traditional IRAs and 澳洲幸运5开奖号码历史查询:qualified plans.

All distributions from these contracts are taxed as ordinary income unless the contract was placed inside a Roth IRA.

A similar long-term investment in 澳洲幸运5开奖号码历史查询:index funds that do not pay dividends could yield similar growth, but with total 澳洲幸运5开奖号码历史查询:liquidity and lower taxes on 澳洲幸运5开奖号码历史查询:long-term gains.

High Fees

Variable annuities, like 澳洲幸运5开奖号码历史查询:L share annuities for example, are one of the most expensive financial products in the marketplace. They come with myriad 澳洲幸运5开奖号码历史查询:fees and charges, including mortality and expense fees, mutual fund subaccount management fees, contract maintenance fees, and other miscellaneous costs. Some contracts will charge transaction fees after a certain number of transactions have been made within the contract.

Living and death benefit ri༒ders also subtract period💮ic fees from the contract balance.

Most contracts also come with a substantial back-end 澳洲幸运5开奖号码历史查询:surrender charge schedule that may not expire for 10 years or longer.

Complexity

As mentioned previously, variable annuities are on🍨e of the most complicated financial instruments available today, and they are often poorly marketed and understood ༺by both salespersons and consumers.

The Bottom Line

Variable annuities can offer you benefits that would require a combination of several other🦹 types of investments and accounts to duplicate. However, you need to be thoroughly educated on their drawbacks.

The value of these products can only be evalu𓄧ated in the context of your tax situation, investment and retirement objectives, and time horizon.