Buying Variable Annuities
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An annuity is a series of payments. If the amount of the annuity varies, it is called a variable annuity. Life insurance companies sell variable annuities, which are tax-deferred investments. If you buy a variable annuity, you select from a range of mutual fund-like investments called subaccounts.
A subaccount's investment performance determines the future value of a variable annuity. Subaccounts are often conservative funds that invest in bonds with the highest credit rating. Some annuities also offer subaccounts that invest in stocks.
You should carefully read the prospectus of an annuity and the subaccounts that you select before investing. The investment objective shown in the prospectus indicates the kinds of investments that the fund buys.
In addition to resembling mutual funds, annuities also resemble life insurance. Similar to a life insurance policy, you name a beneficiary to receive a death benefit if you die. Fees for a variable-annuity contract also resemble those of a life insurance policy:
It's important to remember that variable annuities are already tax-deferred investments. As a result, you receive no additional tax savings if you buy them for other tax-advantaged accounts.
The Securities and Exchange Commission (SEC), which regulates the variable-annuities industry, advises that you only buy variable annuities after you contribute the maximum allowable amounts to your IRAs and other tax-advantaged accounts.
Because variable annuities have high fees and are taxed as ordinary income, it takes a long time for their returns to match the investment returns of other tax-advantaged accounts. However, variable annuities may be attractive for long-term investors in some cases since they offer the following features:
You may wish to keep in mind these additional tips:
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
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