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Should you choose variable annuity?

Variable annuity (VA) has become the topic of the season given the ongoing economic crisis.  People who have invested in the variable annuity funds with the hope of gaining more on the money on their retirements have suffered great loss with the market downturn.

Variable annuity plans help the investor’s to put their money into various investment tools like- stocks, bonds and money market. Hence, the return on a variable annuity fund is indexed to the performance of the market.

Death benefits with the variable annuity

One feature that would put the variable annuity plan ahead of the other retirement vehicles is the offer of death benefit, i.e. if the annuitant dies before the commencement of the annuity, the beneficiary would receive death benefits. Many investors get attracted towards the variable annuities because of its guaranteed offer of death benefits.

Tax advantage

One may enjoy the benefits of tax deferred growth in money with the variable annuity plans. Further, there is a limit as to how much you can invest in the 401k and IRA accounts. The VAs can solve this problem by allowing the policy holder to continue tax deferred gains on his annuity account.

Economic crisis and variable annuity

People who were close to their retirement age and have invested in the variable annuity funds were the worst sufferer of the economic crisis. Why? To understand the reason the one needs to understand how VA works.

The income that you would receive from the VA plans is tied with the trends of the market. Variable annuity plans are also known as ‘mutual funds in insurance wrapper’. Therefore, if the market index falls you may even lose the principal amount that you have put in the account if you haven’t opted for the premium protection option. But, when the marker is bullish you may earn good return on your fund.

Other disadvantages of Variable annuity

Variable annuity contracts are often irreversible, i.e. once you enter in the contract you are locked into it. Early withdrawals from the fund before the age of 591/2 would attract 10% penalty.

Secondly, the insurance company may keep the remaining of the fund if the annuitant dies within a short time after the commencement of annuity income. This is one aspect that has made variable annuity an unpopular choice for many.