Variable annuity

As a financial product sold by life insurance companies, it's no surprise that variable annuities have similar features to life insurance. Variable annuities are a hybrid financial product, combining features of mutual fund investing and life insurance.

A variable annuity is a contract. You buy the contract with an initial purchase payment, investing in a variety of subaccounts that the insurance company sells. Similar to investing in a mutual fund, you should always read the prospectus of a subaccount before investing.

Some of the features that variable annuities share with life insurance include:

Designating a beneficiary. Life insurance policies and variable annuities require you to designate a beneficiary. In the event you die during an annuity's accumulation period, or before a certain point in the payout period, your beneficiary receives a death benefit.

Your beneficiary is generally entitled to receive the greater amount of the annuity's contract value or value of purchase payments. Death benefits are paid as a lump sum or as an annuity. For an extra charge, you can usually buy an enhanced death benefit.

Payments based on investment performance. When you buy a life insurance policy, you pay a premium. With permanent life insurance, your premiums accumulate a cash value. Depending on the type of permanent life insurance coverage, some of your premiums are invested in riskier investments such as stocks or bonds. Universal and variable universal life insurance policies let you switch to flexible premiums, or stop paying premiums temporarily, when your cash value grows to an adequate level.

Cash value accumulates to provide continued coverage. With permanent life insurance, the cash value of your policy continues to provide insurance coverage even if you stop making premiums. (If you're buying term life insurance, your premiums do not accumulate a cash value and your policy lapses when you stop paying premiums.) In other words, the cash value is a reserve of funding future premiums. This reserve gives you flexibility in paying your premiums.

It's helpful to think of a variable annuity's contract value in a similar way. The contract value is the source of annuity payments when the payout period begins. If investment performance is better than expected, it boosts an annuity's contract value, giving you a respite from additional purchase payments.

Optional premiums buy extra or enhanced coverage. With life insurance policies, you can often pay a premium to guarantee a minimum death benefit. Variable-annuity contracts also include options (at an extra charge) for guaranteeing a minimum annuity payment or death benefit. Guarantees are insurance in their purest form: a chance for you to swap uncertainty for certainty with an insurer that is willing to underwrite that risk in exchange for a fee.

Fixed vs Variable Annuities

In a fixed annuity, the insurance company guarantees the principal and a minimum rate of interest. In other words, as long as the insurance company is financially sound, the money you have in a fixed annuity will grow and will not drop in value. The growth of the annuity and/ or the benefits paid may be fixed at a dollar amount or by an interest rate, or they grow by a specified formula. The growth of the annuity;s value and or/ the benefits paid does not depend directly or entirely on the performance of the investments the insurance company makes to support the annuity. Some fixed annuities credit a higher rate of interest than the minimum, via a policy dividend that may be declared by the company's board of directors, if the company's actual investment, expense and mortality experience is more favorable than was expected. Fixed annuities are regulated by state insurance departments.

Money in a variable annuity is invested in a fund, like a mutual fund but one open only to investors in the insurance company's variable life insurance and variable annuities. The fund has a particular investment objective, and the value of your money in a variable annuity- and the amount of money to be paid out to you- is determined by the investment performance of that fund. Most variable annuities are structured to offer investors many different fund alternatives. Variable annuities are regulated by state insurance departments and the federal Securities and Exchange Commission.

Deferred Annuity

Deferred Annuity - 

A type of annuity contract that delays payments of income, installments or a lump sum until the investor elects to receive them. This type of annuity has two main phases, the savings phase in which you invest money into the account, and the income phase in which the plan is converted into an annuity and payments are received .

A deferred annuity can be either variable or fixed.

Earnings on a deferred annuity account are taxed only upon withdrawal, providing the annuity with a tax benefit. This type of annuity also provides a death benefit, so that the beneficiary of the annuity is guaranteed the principal and the investment earnings.

Variable Annuity

Variable Annuity - 

An Insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio.