The variable annuity
A variable annuity resembles a 401(k)--you decide the make-up of your portfolio. The premium can be split into subaccounts and invested into market segments of varying risk.
Variable Annuity Advantages
- Safe creation of wealth for your heirs
- Tax-deferred growth
- Principal and interest guaranteed
- Avoidance of probate for your heirs
- Increased death benefit
- Market-linked gains without the downside risk
Variable Annuity Disadvantages
- Income withdrawals before the age of 59.5 are charged a 10% tax penalty by the IRS.
- Growth is tax-deferred, but eventually income is taxed an ordinary income tax rates.
- Unlike fixed-rate instruments, variable annuities can depreciate in value.
- The insurance company usually imposes a penalty if withdrawing over the yearly allotment.
- Some variable annuities incur a 1-3% annual management fee.
- A $25-35 annual charge paid to the insurance company to cover administrative expenses.
