Variable Annuity Buying Tips

Variable Annuity Buying TipsBy Toma Franklin, Staff Writer

Variable annuities bring many advantages to the table for investors looking for a secure and high value investment, especially for those concerned about a steady post retirement income. But with a proliferation of annuity products and issuing insurance companies competing to catch the eye of retiree investors, it becomes a lot easier if you know what you want, and more importantly, if you know what questions you need to ask. Every industry and sector has its own insider tips and tricks which offer a better deal and additional benefits. What is about variable annuities that you need to know?

To be specific, we will be discussing non qualified deferred variable annuities. These are funded with post tax funds and are not held inside a qualified retirement plan, such as a 4019k) plan. Also, we assume, for this discussion, that the annuity holder intends to defer payments and accumulate the cash value of the contract, instead of opting to receive immediate monthly payments in return for investing a lump sum. A variable annuity holder has to arrange for both the savings phase and the income phase to match his resources, retirement timeline and post retirement needs.

The amount you have available in the income phase depends entirely on the performance of the underlying investments. While stocks produce gains in excess of inflation over an extended period, the markets also experience erratic fluctuations. Thus, variable annuity investments made in equity portfolios for significantly longer periods have a big possibility of out performing other investments over the same period.

While this may be an effective long term strategy, sometimes investors need to make changes in investments as per current requirements. A variable annuity provides considerable flexibility in this regard, with the ability to switch complete or partial annuities and transfer investments to different sub-accounts, totally tax free. So if you feel that a certain investment has good possibilities over the short term, you can make a run, add solid gains to the contract, and shift the funds back to the long term equity – Without paying any tax. Mutual fund investments do not allow for this kind of flexibility and savings.

In addition, variable annuity products offer insurance benefits such as a minimum guaranteed death benefit which may be equal to your investment to date or more resulting from locked in annual gains. Withdrawals before the retirement income kicks in are also allowed, subject to IRS regulations and the company's policy regarding withdrawals. Early withdrawals are charged with a 10% penalty by the IRS, and surrender charges may also be payable to the issuing company. However, most insurance companies will allow withdrawal of a certain amount each year without any surrender charges.

The post retirement income payment or withdrawal options from variable annuities offer a range of options, from annuitization to setting up a systematic withdrawal strategy. While annuitization will guarantee you a lifetime income stream, a systematic withdrawal means that each payment is made of two parts – Part principal and part earnings. At some point, these payments will dry up. Your withdrawal strategy should take into account your health and life expectancy, additional resources other than the annuity and your plan for leaving an inheritance for your family.