Annuity Fax

A variable annuity, or VA for short, is a tax deferred investment vehicle that allows you to invest your money in sub-accounts, similar to mutual funds. A variable annuity allows investors to differ taxes until a later date, much like a 401 (k) plan or an IRA account.While an investor may invest qualified money in a variable annuity, such as an IRA, a variable annuity can be purchased with after tax dollars. This is referred to as a non-qualified variable annuity, but even though it is a non-qualified variable annuity many of the same restrictions are imposed on this product as if it where a IRA or 401 (k) plan.

These restrictions include a premature penalty if the funds are withdrawn prior to age 59 ½. Also, with a variable annuity contracts earnings are taxed at ordinary income instead of long-term capital gains tax, but principal is returned tax fee as the taxes were already paid on that money. Some argue that the ordinary income taxation of variable annuities outweighs the tax deferral benefit, but that simply is not true as money grows significantly faster tax deferred versus as if it were taxable.

There are fees involved in a variable annuity product and the most common fee is the mortality and expense charge, called the M&E fee. This fee is fairly standard in the industry and averages 1.35% and this only covers the basic variable annuity contract and no other optional riders. This fee basically covers marketing expenses of the variable annuity firm, commissions paid to the adviser, administration of the contract and the basic other provisions the contract may offer, such as tax deferral, nursing home waiver, terminal illness waiver and spousal continuation.

Along with the traditional variable annuity benefits many contracts offer optional riders or benefits. These optional annuity benefits can vary from up-front premium credits (an enhancement of 2 to 6% on all premiums paid to the contract), to optional death benefits or optional living benefits. The vast majority of variable annuity contracts are sold with living benefits and these are responsible for the products popularity over the last 8 years.

A variable annuity living benefit is an optional rider, that costs extra, that will guarantee either current or future income. There are several different types of variable annuity living benefits offered some are anuitization benefits while others simply provide guaranteed withdrawals for as long as the owner is alive. Listed below are the different types of living benefits:

Guaranteed Minimum Income Benefit (GMIB) Annuitization benefit

Guaranteed Minimum Account Balance (GMAB) Return of principal benefit

Guaranteed Minimum Withdrawal Benefit (GMWB) Withdrawals for a minimum number of years

Guaranteed Withdrawal Benefit For-life (GWBL) Withdrawals for as long as you live

All of these variable annuity benefits will guarantee you withdrawals or income regardless of how your investments perform. In many cases these annuity benefits can step-up and increase either your current income or future income if you have positive investment results. This downside protection is why many investors have turned to variable annuity products when they reach retirement age.With the base cost of a variable annuity at 1.35% and a living benefit charge of .65%, this can vary depending on the living benefit type and company, the base cost of a variable annuity is about 2%. There are also sub-account charges as well which can range from .40% to over 1%. These fees may seem high, but with the tax deferral, guarantees and investment options within one product the variable annuity offers many investors the piece of mind and security they are looking for.

A variable annuity, even with a living benefit, is not suitable for everyone as they involve risk, fees and surrender charges, but for many seeking some safety in the turbulent times in the equity market they can make sense. You should consult a financial adviser to see if this product is right for you.