Before variable annuities can be adequately understood, it is important to have a certain level of knowledge of its underlying concepts.  Essentially, it is a type of financial product that is sold by various financial institutions.

This type of financial product is designed to accept and grow funds from investors and upon annuitisation and give out stream of payments to the investors based on a predefined period.  One of the main reasons for annuities is that they help to provide a steady flow of cash especially during retirement.

The concept of annuities is commonly used in relation to finance theory to reference different terminating streams of fixed payments covering a certain period.  It is normally covered in finance discussions, in connection with the valuation of the payments with consideration of the value of the money concepts involved like future value and interest rate.

Some common examples of annuities can include regular deposits for savings accounts, monthly insurance premiums, and monthly home mortgage payments among others.  Usually, payments are made weekly, monthly, quarterly, annually, or at some other defined interval.

Structure of Annuities

There are a number of factors that can determine the actual structure of annuities like guaranteed payment period for example.

The annuitization, process of conversion of annuity investment to series of regular payments, continues based on the schedule provided that either the annuitant or spouse remains alive.  An alternative structure allows for payouts of funds to be made based on a fixed period like for 20 years for example without regard as to whether the annuitant or spouse survives that time.

The payments are either fixed or variable depending on the type of annuities chosen.  The intention of variable annuities is to give the annuitant the chance to receive higher payments, especially when the investment performs well.  It is however expected that payments can be comparatively smaller if the investments do not come out as expected.  The problem with the scenario is that it creates a less stable and not very suitable cash flow during the retirement years.

This is in stark contrast to the guaranteed payments provided by fixed annuities, which allows for the annuitant to receive the same amount of benefits without regard to the performance of the investments.  Various ways that annuities can be structured allows investors looking for annuities to take advantage of flexibility, to construct an annuity contract based on their specific requirements.

Variable Annuities Explained

There is a growing trend that has made variable annuities become more marketable than any other annuity option so far.

The result is that the amount of sales associated with this investment has soared rather dramatically in recent years.  Unfortunately, popularity is not a real indicator of the practicality of any investment portfolio. The reality is that no more than a fraction of people involved in investing have a clear sense of understanding what annuities are for.

The proof is that for majority of investors, mutual funds make better sense.  This of course will be disputed by the suited investment people that keep on calling on you to put your signature on that dotted line.  This is the reason why it is important to understand the basics of variable annuities, especially the risks involved.

Basics of Variable Annuities

Variable annuities are essentially considered as tax-deferred investment vehicles that are covered by an insurance contract.  It is commonly designed to deliver protection from losses in capital.

Because of the insurance wrapper, earnings made from annuity grow tax-deferred with the account exempted from annual contribution limits.  Normally, investors can choose from a number of subaccounts.  These subaccounts are actually menu of mutual funds that fall under the world of variable annuities.

Variable annuities can be classified either as deferred or immediate. Deferred annuities are accounts that grow until the investor decides to withdraw it.  That time is normally when the investor reaches 59 ½ years old or until an early withdrawal penalty is assessed.  Investors also have the option to annuitize payments or make withdrawal depending on their actual needs.  Immediate annuities on the other hand make out payments immediately after the retirement of the investor.

Death Benefits of Annuities

Basically, when it comes to annuities, death benefits simply guarantee that the account of the investor will remain at a certain value even if the investor should die before any payments of annuities have begun.  In terms of basic accounts, this translates to the  assurance of the beneficiary that at least the total amount invested will be paid back, regardless whether the investment made money or not.

An additional fee can be made on annuities to ensure that the amount guaranteed can be substantially higher or include a small interest amount.  It is equally important to note that if you do not opt to annuitize your investment, death benefits typically expire at about 75 years of age.

Immense advantage would therefore be enjoyed by the beneficiaries of investors who have died in about two months after buying annuities.

This information can help you make a more educated decision on how to deal with variable annuities and should not be construed as personal financial advice.