Variable annuities are a type of insurance contract that offers the potential for higher returns than traditional fixed annuities.
They are a complex financial product, so it's important to understand how they work before investing.
Variable annuities have two phases: the accumulation phase and the payout phase.
Accumulation Phase: During the accumulation phase, you invest money in the annuity. The money is invested in a variety of subaccounts, which are similar to mutual funds. The value of your investment will fluctuate based on the performance of the subaccounts.
Payout Phase: During the payout phase, you begin to receive payments from the annuity. The amount of your payments will depend on the performance of the subaccounts during the accumulation phase.
Potential for Higher Returns: Variable annuities offer the potential for higher returns than fixed annuities.
Tax-Deferred Growth: The earnings in your variable annuity grow tax-deferred, which means you won't have to pay taxes on them until you withdraw the money.
Death Benefit: Most variable annuities have a death benefit, which guarantees that your beneficiaries will receive at least the amount of your original investment, even if the value of your account has declined.
Flexibility: You can typically change your investment allocation at any time.
Risk: The value of your variable annuity can go up or down, so there is a risk of losing money.
Fees: Variable annuities can have high fees, which can eat into your returns.
Liquidity: Your money may be locked up in a variable annuity for a certain period, which means you may not be able to access it easily if you need it.
Variable annuities can be a good option for people who:
Are comfortable with some investment risk.
Are looking for the potential for higher returns.
Have a long-term investment horizon.
If you are considering purchasing a variable annuity, it is important to work with a qualified financial advisor. A financial advisor can help you understand the risks and benefits of variable annuities and choose a product that is right for you.