Amongst all types of investing and all variety of investing strategies, a variable annuity investing stands out of a crowd due to several reasons and many investors prefer getting into it because it definitely brings some advantages. Let’s take a closer look at this type of investing, so you will be able to take advantage of it.
Understanding Variable Annuity
Being a sort of a mix between an Insurance and Investment Contract, Variable Annuity policy offers lifetime payments to an investor. The only difference between investing on your own is that it’s not you but the Company who decides what vehicle your money will be invested in.
Why many investors take variable annuity investment options as a sort of insurance against the unfavorable behavior of their main assets? The reason is plain and simple. Let’s say you have a certain pool of vehicles in your portfolio with the fixed annuity. Everything is great as long as the economic situation is predictable and the inflation rate is relatively stable and low.
But what if economic environment changes and you start losing your money because your fixed annuity vehicles do not bring you the planned income, just because the value of that vehicles decrease of the value of the money itself goes does (inflation)?
The solution is to diversify the portfolio with stocks and bonds with the variable annuity that offer much higher interest rate. These instruments’ interest rate (and thus, your income) is linked to a certain index, rather than to a fixed %. If the index shows positive behavior, the profit of an investor goes up, as variable annuity rise. On the other hand, if circumstances play not in investor’s favor, annuities will be decreased.
Outpace the inflation with the variable annuity
Variable annuity investing was designed exactly to outpace the yearly inflation rate that may wipe out the profit that is brought by the fixed-annuity vehicles with relatively low % of yield. For this advantage, an investor pays with the increased risk and instability of variable annuity vehicles.
The variable annuity investing could be considered as an element of retirement plan which brings advantages of both Insurance and Investing: you get your regular guaranteed payments and in case of death the death benefits will be paid to the family (the amount cannot be less than an initial investment made, regardless of the investment performance of the Company).
The inconvenience is that annuities could be withdrawn only once a year and you cannot influence the investment decision and strategy the Company applies. The benefit is that payments are made during the lifetime of a policyholder regardless of the time period.
Accumulation and payout phases
During an accumulation phase, an investor makes payments to allocate his funds within certain vehicles – bonds and stocks. Just like with investing in a mutual fund, investor’s money could be grown or lost (partially) depending on the Company’s performance.
During a payout phase, an investor gets paid in accordance with investing results of the Company. Even in a case of the worst investment scenario, a person gets the guaranteed minimum yield (typically 3% yearly).
Another beneficial aspect of Variable Annuity Investing is that it goes via special, tax-deferred subaccount. That doesn’t mean that the payments received by the policyholder are tax-free, but instead of paying taxes for the period the money was earned, an individual is allowed to pay taxes later in the future when his income is grown enough for making tax payments painless for the budget.