Variable Annuity Life Insurance

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Variable Annuity Life Insurance
Variable life insurance is a type of permanent life insurance. Like all permanent life insurance products, it has two parts: The death benefit, which is the amount of money paid to the beneficiary when the policyholder dies, and the built-up cash value account to which interest is credited while the policyholder is alive and paying premiums. » Contact a Financial Advisor

Variable Annuity Definition
A variable annuity is a financial product that pays the annuitant an amount of money each month. The premium, or the amount given to the insurance company, is invested in either stock, bond or money market funds in order to capture gains that exceed those of Treasury bills and bonds. An annuity, then, is almost the direct opposite of life insurance. Life insurance pays when the policyholder dies, while an annuity pays as long as the policyholder is alive. However, the important distinction is that an annuity can be structured to pay a beneficiary upon the death of the original policyholder. This type of combined product is relatively new and is not suited for all investors. A variable annuity can be set up to be a type of variable annuity life insurance. For example, the original annuitant can purchase a contract that specifies his or her spouse also receives monthly payments or that he or she receives the balance of the premium that has not yet been paid out. In this way, the variable annuity functions both as an annuity because it pays out monthly, and it functions as a life insurance product because it pays a beneficiary upon the death of the original policyholder. However, the loss of risk of principal may affect the amount available for the death benefit.

Where Can an Investor Buy Variable Annuity Life Insurance?
Insurance companies are allowed to sell variable annuities along with life insurance. Investors should be aware, however, that because variable annuities invest in the stock market, that the sales person should not only be licensed by the state to sell insurance but must also be registered with the Securities and Exchange Commission. He or she may also be required to have other licenses and registrations depending on the state in which he or she sells the insurance and financial products. The owner of a variable annuity life insurance product can usually choose among several different types of investments. Some insurance companies offer 20, 30, 40 or more kinds of investments ranging from ultra-conservative to ultra-aggressive. Investors can also select between domestic and foreign funds. One of the best advantages provided by a variable annuity

life insurance product is the almost instant diversification it can provide. If the investor chooses two or three sectors that are not connected to one another or dependent on one another for the gains, he or she can create a relatively inexpensive “portfolio” of investments. One caveat to this type of product is that the risks are solely that of the investor. He or she is responsible for choosing the investments. While the insurance company purchases the funds and manages the account on the investor’s behalf, the gains, or losses, reside with the investor. Some insurance companies allow the policyholder to choose between a fixed and variable death benefit. The death benefit on a fixed policy is set when the policy is written. It is for that amount and that amount only, regardless of how much cash has accumulated in the account. A variable death benefit pays not only the face value of the policy but also the amount of cash that has built up.

Don't Just Shop, Implement a Solid Retirement Strategy
Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consulation today, along with a report of current rates on brand-name annuities. Speak with an advisor over the phone about annuities for FREE. (limited time offer)

Who is Best Suited for Variable Annuity Life Insurance?
Variable annuity life insurance is usually best suited for individuals who have more than just a little understanding of insurance and financial contracts. It is also helpful for investors to have a deeper understanding of how fluctuations in the stock and bond markets will affect the value of the annuity. For example, during a market downturn, it is possible for a variable annuity life insurance product to lose money. The principal within the policy is always at risk. While an investor can achieve great gains during market upswings, the level of risk must match his or her level of tolerance. It is important to remember that a variable annuity life insurance product is part insurance and part investment product. For investors whose primary need is the death benefit in order to provide for a beneficiary, a more standard life insurance policy may be a better choice.

What are the Options to Variable Annuity Life Insurance?
One alternative to a variable annuity life insurance policy is a whole life policy. A whole life policy also provides permanent insurance that lasts for the life of the policyholder. The portion of the premium that is invested, along with earnings that are credited to the cash portion of the account, grow tax-deferred until the policy is either surrendered or until it matures.

With a participating whole life policy, an investor in effect becomes a shareholder in the insurance company. He or she is paid a dividend based on the financial performance of the company. The dividend can be credited to the account, or it can be taken as cash. In this way, it mimics the variable annuity because it not only provides a death benefit but also provides for a monthly or quarterly payout. Further, the tax treatment of a whole life policy may also be more beneficial to certain policyholders. As the proceeds paid to a beneficiary are not normally taxable, a whole life policy may be a more effective estate planning strategy than a variable annuity life insurance policy. And, an annuity represents a financial contract that cannot be broken. Once the premium is given to the insurance company, it will not be returned except in the form of the payouts. A whole life policy, on the other hand, may be surrendered. While the policyholder may not receive the entire amount back, he or she will at least have a vested amount that could be returned. To find the best annuity products request a free, comprehensive quote comparision. Secure your retirement today, Get Started Now.

Variable annuities allow money to be invested in insurance company "separate accounts" (which are sometimes referred to as "subaccounts" and in any case are functionally similar to mutual funds) in a tax-deferred manner.[3] Their primary use is to allow an investor to engage in tax-deferred investing for retirement in amounts greater than permitted by individual retirement or 401(k) plans. In addition, many variable annuity contracts offer a guaranteed minimum rate of return (either for a future withdrawal and/or in the case of the owner's death), even if the underlying separate account investments perform poorly. This can be attractive to people uncomfortable investing in the equity markets without the guarantees. Of course, an investor will pay for each benefit provided by a variable annuity, since insurance companies must charge a premium to cover the insurance guarantees of such benefits. Variable annuities are regulated both by the individual states (as insurance products) and by the Securities and Exchange Commission (as securities under the federal securities laws). The SEC requires that all of the charges under variable annuities be described in great detail in the prospectus that is offered to each variable annuity customer. Of course, potential customers should review these charges carefully, just as one would in purchasing mutual fund shares. People who sell variable annuities are usually regulated by FINRA, whose rules of conduct require a careful analysis of the suitability of variable annuities (and other securities products) to those to whom they recommend such products. These products are often criticized as being sold to

the wrong persons, who could have done better investing in a more suitable alternative, since the commissions paid under this product are often high relative to other investment products.

Variable Annuity Features
An Overview
The following features are common to all variable annuities:
   

Variable Returns Portfolio Sub-accounts Tax-deferral Unlimited contributions

Variable Returns
A variable annuity works differently than the "classic" fixed annuity. The difference is like that between a 401(k) and CD. There is no guaranteed rate for a variable annuity. Rather, you invest in a professionally managed equity portfolio that's composed of seperate sub-accounts. The contract owner tells the portfolio manager which investments to make, and how money should be allocated across sub-accounts. The advantage of variable annuities is full growth ownership; the disadvantage is full loss ownership. Because your portfolio gets vested in market-linked equities and bonds, it's impossible to predict rates of return for all but very long term scenarios. One year might yield a positive return of 15%, while another might lose 10%. Variable annuities are less predictable than their fixed counterparts but yield better returns. In the end, equities always surpass interestbased vehicles, with averages of 12% over a 30 year span.

Historic Asset Class Yields

Variable Annuities Pros and Cons
No investment product has created as much controversy or spawned so much division as the variable annuity. Since its introduction in the early 1980s, it has gone through periods of tremendous popularity and relative neglect. A sizable body of literature, both technical and popular, has examined its virtues and defects. At this point we can enumerate the pros and cons of variable annuities pretty thoroughly. Simple enumeration doesn’t resolve the debate over the merits of variable annuities. That requires evaluation. Listing pros and cons does provide a convenient reference to aid financial planners and investors in that evaluation. » Compare Actual Variable Annuity Products

Variable Annuity Pros
Tax deferral – The ability to defer taxes on an investment is a valuable privilege. Most attention focuses on the higher growth attained when investment gains accumulate free of annual taxation. This is not the only benefit of tax deferral. For example, recent academic studies suggest that asset allocation, rather than active management, is the best tool for maximizing rate of return. Tax deferral allows rebalancing of portfolios without creating a taxable event. Another advantage of tax-deferral is that, in principle, the annuityholder is likely to face lower tax rates in retirement than while working. Growth orientation and equity-grade returns – Variable annuity subaccounts are designed to imitate mutual funds; this facilitates equity investment and the pursuit of growth and high rates of return. Consumer-directed investment – The investment program of other annuity types is controlled by the issuing insurance company. Variable annuities allow the consumer to manage his or her own investment, at least to the degree allowed by the choice of subaccounts. Liability protection – Many states shield proceeds of insurance assets from attachment in litigation, which makes variable annuities an attractive growth investment for business owners and professionals threatened with liability lawsuits. Some provision for liquidity – Many variable annuities allow annual withdrawals of up to 10% of principal. Waiver of surrender charges for various contingencies, ranging from disability to terminal illness, is also sometimes offered. Possibility of superior investment performance – Some analysts contend that the deterrents to premature redemptions allow portfolio managers more freedom and lead to superior performance.

No limitation on investment amount – Variable annuityholders do not face the annual contribution limits placed on holders of IRAs, 401(k)s and other tax-advantaged retirement plans. No minimum required distributions – IRAs require minimum required distributions to begin no later than the holder’s age 70 ½. There is no such requirement for variable annuity distributions. Option to annuitize – The variable annuityholder can withdraw funds at discretion once distribution commences or, alternatively, convert funds into a life annuity guaranteeing lifelong income. Annuities are the only investment offering a guaranteed income for life. Avoidance of probate – The death-benefit feature of the variable annuity makes it life insurance. This should enable a beneficiary to inherit variable annuity assets directly, without waiting for probate to clear. An equivalent feature may, or may not, be available with alternative investment products. Living Benefit riders – In the last decade or so, variable annuities have increasingly offered policies or riders that guarantee levels of yield, income, and withdrawals. These have proved popular. Not too surprisingly, some companies have scaled back or discontinued them in light of the current recession.

Don't Just Shop, Implement a Solid Retirement Strategy
Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consulation today, along with a report of current rates on brand-name annuities. Speak with an advisor over the phone about annuities for FREE. (limited time offer)

Variable Annuity Cons
High expenses – This is perhaps the biggest knock on variable annuities. Variable annuity subaccounts incur expenses that detract from their annual yield, just like the mutual funds that they mimic. But the insurance company incurs additional expenses in operating the subaccounts and adding insurance features, such as death benefits and guarantees. Total annual expenses may reach 3% or more. Surrender charges and penalties for premature withdrawal threaten to add to the list. Taxation as ordinary income upon distribution – Unlike mutual fund redemptions, variable annuity investment gains are taxed as ordinary income upon distribution. Since income tax rates currently exceed the long-term capital gains rate of 15%, this wipes out some of the tax-deferral gains of variable annuities.

No step-up in cost basis for heirs – Again unlike mutual funds, variable annuities do not receive a step-up in cost basis to the valuation as of date of death, making them unattractive for estate-planning purposes. Liquidity limitations – Variable annuities have surrender charges that often run as high as 510% in the first two years after purchase, tapering off to 1% in succeeding years. The charges may last for as long as 10 years or, rarely, longer. Premature withdrawals (made prior to the annuityholder’s age 59 ½) incur a 10% tax penalty as well as ordinary income taxes.State taxation – Some states levy excise taxes on variable annuities; these are passed along to annuityholders by the insurance company. Transaction limitations – Some variable annuities place limits on the number of annual transactions allowed in a variable annuity before transaction charges are imposed. Variable annuities cannot substitute for life insurance – Although variable annuities usually offer a death benefit, that does not make them a good substitute for a life-insurance policy. Ordinarily, insurance need will greatly exceed the amount available via a variable annuity.

Weighing Variable Annuities’ Pros and Cons
The foregoing lists illustrate the difficulty of reaching a summary verdict on variable annuities. Instead, they must be evaluated in context – either as part of a specific financial plan developed for people with particular needs, preferences and circumstances, or in comparison with a known investment alternative with definite attributes. Variable annuities rate to be a good choice for middle-aged, growth-oriented investors who have maxed out their tax-advantaged retirement-plan contributions but still have cash available. They can be life-savers for high-earning professionals faced with the ever-present specter of liability loss. These are people for whom the drawbacks of variable annuities are non-existent, small, or dwarfed in comparison to the risks that variable annuities would avoid. Alternatively, variable annuities rate poorly for young newlyweds with modest incomes and little liquidity, as well as for the risk-averse elderly who need liquidity. These are people for whom variable annuities’ drawbacks loom large relative to their advantages.

Take That Thumb Off the Scales
Many studies have purported to find variable annuities inferior to taxable mutual funds. Unfortunately, the conclusions are typically reached by weighting variable annuities’ disadvantages heavily and dismissing their advantages. For example, the comparison usually pits a low-cost mutual fund (such as an index fund) against a high-cost variable annuity. The consumer would never suspect that mutual funds can also have high costs (international funds are notoriously high), sometimes levy sales loads on purchases, and often impose high fees and their own version of surrender charges (called redemption charges). Why not compare a low-cost variable annuity to a high-cost mutual fund? Somehow this almost never seems to happen.

The sensible approach is to treat variable annuities as a specialty product with very desirable features but drawbacks that may make them unsuitable for certain people and groups. Like medicine, variable annuities can be beneficial and even invaluable for the right customer, but disastrous for the wrong one. One good approach might be to start by studying the list of cons. If these don’t seem too injurious, then proceed to the list of pros with a reasonable expectation that the benefits of variable annuities will exceed their costs. To find the best annuity products request a free, comprehensive quote comparision. Secure your retirement today, Get Started Now.

» Get Quotes on the Best Variable Annuities

Variable Annuity Sub-accounts
A variable annuity portfolio is partitioned into sub-accounts that vest in different asset classes. Sub-account options vary from plan to plan, but can include:
 

Money market Government Bonds (short-term, intermediate-term, and long-term)

  

Corporate Bonds U.S. Stocks (blue-chip, aggressive, sector-specific) International Stocks

Good variable annuities offer a broad assortment of asset classes to choose from. The benefits are two-fold, diversification and asset allocation. While two strategies may seem similar, they are in fact different. Spreading money across multiple investments within an asset class (like U.S. stocks) is diversification, mitigating against volitiliaty resulting for individual stock performance. Spreading money across mutliple assets classes (like bonds and stocks) is asset allocation, managing your exposure to excessively risky investment vehicles.

Tax-deferral Benefits of Variable Annuities
Variable annuities are tax-deferred. Any income accumulated doesn't get taxed until it's withdrawn. As a result, deferring withdrawals to amass a tex-deferred nest egg is the ideal annuity investment strategy. Unlike mutual funds and CDs, which get taxed on an annual basis, your money will compound faster over time, ultimately yielding a much greater balance.

Don't Just Shop, Implement a Solid Retirement Strategy
Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consulation today, along with a report of current rates on brand-name annuities. Speak with an advisor over the phone about annuities for FREE. (limited time offer)

Unlimited Contributions
One of the problems with a government sponsored retirement plan, like a 401(k) or IRA is the annual contribution cap. For wealthy investors, or those needing to jump-start their retirement plan, $15,000 per year is not enough. Variable annuities don't have these limits, giving you the flexibilty of unlimited investment. An additional feature common to most variable annuities are flexible premiums. Unlike fixed annuities, which only allow a single up-front deposit, variable annuties work like brokerage accounts. The advantage is in being able to invest a smaller premium up front and continue adding to your account in the future. With flexible premiums you can keep funding your retirement plan, varying periodic contributions according to your changing financial position. Still have questions about what variable annuities can do for your retirement? Request a free quote comparision today and speak to a licensed annuity specialist. Get Started.

Types



Two main classes of variable annuities exist: deferred and immediate. The immediate variety allows investors to make one lump payment, after which they begin to receive benefits after a set short period of time, such as two months. The deferred variety falls into two subcategories: periodic-payment deferred annuities and single-premium deferred annuities. The latter are similar to immediate variable annuities in that investors make one lump payment. However, they do not begin to receive benefits until after a much larger interval of time. Periodic-payment deferred annuities also do not pay benefits until a later date, but investors make regular payments instead of just one. Some companies divide variable annuities further into non-qualified and qualified categories. The former refers to variable annuities that investors purchase independently, while the latter are acquired through retirement savings plans offered by employers.

Read more: Types of Variable Annuities | eHow.com http://www.ehow.com/about_4727786_types-variable-annuities.html#ixzz1X9H7X2rK

Features


With the exception of the immediate type, variable annuities have an accumulation phase, during which investors make payments to their account, and a payout phase when the backing insurance company disseminates benefits. Another prominent characteristic of variable annuities is an investor's option to choose the death benefit and how it will be paid to beneficiaries, either as the entire amount in the account or a pre-set minimum, as well as a stepped-up death benefit of a larger amount of money than the account has.

Time Frame


Investors in all variable annuities must adhere to strict time and age requirements for making withdrawals if they want to avoid IRS and insurance company fees. Money withdrawn before the age of 59-and-a-half usually results in a 10 percent IRS tax penalty, and insurance companies customarily charge a hefty surrender fee of six percent or more for other withdrawals made before a set time frame, such as seven years. However, surrender fees frequently decrease a certain percentage annually as the surrender period increases.

Benefits


Variable annuities can be attractive for investors who like that they won't have to worry about paying income tax on annuity earnings until they begin receiving benefits or make a withdrawal. Another perceived advantage is the common guarantee that investors will

never receive less than the initial principal amount, even if the annuity investments decrease in value.

Considerations


Variable annuities come with numerous fees, ranging from surrender charges to insurance company administrative fees and IRS early withdrawal penalties. Another major consideration is how much tax must be paid when investors or their beneficiaries start receiving benefits: a whopping 10 percent to 35 percent, depending on their tax bracket, as opposed to the typical 5% to 15% for other kinds of investment benefits.

Read more: Types of Variable Annuities | eHow.com http://www.ehow.com/about_4727786_types-variable-annuities.html#ixzz1X9HNnGya

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