What are the basic features of variable annuities?


Quick Answer

Variable annuity contracts provide purchasers with a fixed tax-deferred income beginning on a particular date for the rest of the beneficiary's life, according to the Securities and Exchange Commission. Investors may obtain a contract with a lump-sum payment or several smaller payments to the contract issuer.

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Full Answer

Variable annuities typically offer a guaranteed minimum payment starting on the payout date, explains the Securities and Exchange Commission. These investments have two phases, with the first phase allowing the account to grow and the second providing direct payments to the investor. The funds invested in the annuity are pooled and used to purchase shares according to the investment strategy chosen by the fund issuer. If the fund performs well, the value of the annuity grows and the beneficiary may receive a larger total payout during the second phase. Even if fund performance declines, a guaranteed rate may provide a reliable long-term income for the investor.

Investors should also be aware of the potential risks of variable annuities, notes the Securities and Exchange Commission. Funds may lose value and reduce the total payments possible during the payout phase. Account and service charges may reduce the total value of the account and may also eliminate any benefit gained by investment growth.

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