Variable Annuities
Variable annuities allow annuitants to invest in sub-accounts for a higher rate of return, with investment value dependent on financial market performance.
What Is a Variable Annuity?
A variable annuity is a type of annuity that is dependent on another financial entity's performance. An annuity is a financial contract that protects financial assets and provides a steady income stream.
Variable annuities can potentially earn interest, but also incur risk, because they are partially invested in mutual funds, stocks, bonds or other financial markets. This option offers a potentially higher rate of return than fixed annuities.
Unlike a fixed annuity which guarantees consistent payments, with a variable annuity the amount you receive every pay period may fluctuate because the interest rate depends on the fluctuating financial market.
How It Works:
- Payments are invested into sub-accounts you choose
- Premium amount may increase or decrease based on performance
- Guaranteed payout regardless of market conditions
- Option to include death benefit for beneficiaries
- Tax-deferred growth on earnings
Variable Annuity Types: Immediate vs. Deferred
While both options guarantee a steady income stream, they differ in how the payout is disbursed.
Immediate Variable Annuity
Provides immediate access to the financial disbursement. The payout begins promptly after the contract is established. An annuitant would pay for the contract in lump sum and immediately begin receiving income payments.
Deferred Variable Annuity
Provides income at a later date, as established within the annuity contract. Two main options available:
- Single-Premium: One-time lump sum payment
- Periodic-Payment: Gradual premium payments until annuitization date
Variable Annuity Pros and Cons
As with any investment, it's important to weigh the benefits against the risks of a variable annuity.
Pros
Guaranteed Payout
Variable annuity owners are guaranteed to receive payments through the end of the term or until death, though amounts may fluctuate per pay period.
Growth Potential
Variable annuities allow annuitants to invest in sub-accounts, providing ample long-term growth potential if investments perform well.
Tax-Deferred Growth
Any interest earned on top of the annuity savings are not taxed until they are withdrawn from the contract.
Death Benefit
Owners can include a death benefit ensuring remaining funds are passed to an heir, with guaranteed minimum of initial investment.
Cons
Surrender Charges
If you break the contract before the end of term, you will be charged surrender fees that can be expensive.
Excess Expenses
Variable annuities carry additional fees including management, administrative, and mortality fees.
Investment Risks
If sub-accounts perform poorly, you risk losing a portion of your investment and receiving lower payouts.
Inflexibility
Once contract terms are finalized, they cannot be altered, especially during the annuitization phase.
Selling Your Variable Annuity
One of the biggest drawbacks of a variable annuity is the investment risk from potential sub-accounts. While investing in an annuity can be profitable, financial needs can change over time.
If you decide owning a variable annuity is no longer right for you, CBC Settlement Funding can help. With an A+ rating from the Better Business Bureau and experience in the financial industry, we can be your solution.
Learn About Selling Your AnnuityLet CBC Help
Our team of experienced, caring professionals will make the process of selling some or all of your structured settlement or annuity payments easy.