Why buy an annuity?
- To create a lifetime income stream to supplement what you
receive from Social Security, pension plans, and other employer-sponsored
- To maintain financial independence. For example, you can
use annuity funds to pay for long-term care expenses and stay in your own home,
rather than rely on your children for care.
- To invest for any specific purpose or long-term goal, such
as providing a legacy for your heirs or making a charitable gift.
- To receive
- If purchasing a variable annuity to fund a qualified retirement plan or an IRA, you should do so for the variable annuity features and benefits rather than for tax deferral. In such cases, tax deferral is not an additional benefit of the variable annuity.
Many variable annuities have riders that can be added for
include riders that allow for withdrawals
for life while retaining access to principal,
riders that provide for a minimum accumulation, and riders that provide for a
A variable annuity is a contract between you (the purchaser)
and an insurance company (the issuer). In return for your premium payments, the
issuer agrees to make periodic payments to you (if you elect this option),
beginning either immediately or at some future date.
Annuity premium payments may be made with after-tax dollars
and are not tax deductible. Annuities also may be purchased within
tax-advantaged plans, such as 401(k) plans, Section 403(b) retirement plans
(TSAs), or IRAs. Premiums for annuities in tax-advantaged plans are generally
paid with pretax dollars, and may be subject to annual contribution limits.
You can pay your premiums in one lump sum, or you can make a
series of payments over time. Annuities funded with after-tax premiums are not
subject to annual contribution limits.
If your annuity is funded with after-tax dollars, you'll pay
taxes (at your regular income tax rate) only on the earnings portion of
withdrawals, since your contributions to principal were made with after-tax
dollars. As with a qualified retirement plan, if you withdraw from an annuity
before age 59½, a 10% tax penalty may be imposed on the taxable portion of the
withdrawal, unless an exception applies.
Annuities are designed to be very long-term investment
vehicles. In most cases, if you take a withdrawal, including a lump-sum
distribution of your annuity funds within the first few years after purchasing
your annuity, you may be subject to surrender charges imposed by the issuer. As
long as you're sure you won't need the money until at least age 59½, an annuity
is worth considering.
Your investment choices are varied
As the purchaser, you can designate how your premium dollars
will be allocated among the investment choices (often called subaccounts)
offered within the variable annuity. A variable annuity's subaccount choices
will be described in detail in the fund prospectus provided by the issuer.
Typical subaccount investment offerings
- Government securities
- Corporate and high-yield bonds
- A balanced subaccount (made up of both stocks and bonds)
- A growth and income account
- A guaranteed subaccount (in which the issuer guarantees* a
minimum rate of interest)
With the exception of a guaranteed subaccount, variable
annuities don't offer any guarantees on the performance of their subaccounts.
You assume all the risk related to those investments. In return for assuming a
greater amount of risk, you may experience a greater potential for growth in
your earnings. However, it's also possible that the subaccounts will perform
poorly, and you may lose money, including principal.
*Guarantees are subject to the claims-paying ability and financial strength of the
A note about variable annuities
Variable annuities are sold by prospectus. Variable
annuities contain fees and charges including, but not limited to mortality and
expense risk charges, sales and surrender (early withdrawal) charges,
administrative fees and charges for optional benefits and riders. You should
consider the investment objectives, risk, charges, and expenses carefully
before investing. The prospectus, which contains this and other information
about the variable annuity and the underlying investment choices, can be obtained from the insurance company issuing
the variable annuity or from your financial professional. You should read the
prospectus carefully before you invest.
How a Variable Annuity
- In the accumulation phase, you (the annuity owner) send
your premium payment(s) (all at once or over time) to the annuity issuer.
- You may choose how to allocate your premium payment(s)
among the various investments offered by the issuer. These investment choices,
often called subaccounts, typically invest directly in mutual funds. Generally,
you can also transfer funds among investments without paying tax on investment
income and gains.
- The issuer may collect fees to manage your annuity
account. These may include an annual administration fee, underlying fund fees
and expenses which include an investment advisory fee, and a mortality and
expense risk charge. If you withdraw money in the early years of your annuity,
you may also have to pay the issuer a surrender fee.
- The earnings in your subaccounts grow tax deferred; you
won't be taxed on any earnings until you begin withdrawing funds or begin
taking annuitization payments.
- With the exception of a fixed account option where a
guaranteed* minimum rate of interest applies, the issuer of a variable annuity
generally doesn't guarantee any return on the investments you choose. While you
might experience substantial growth in your investments, your choices could
also perform poorly, and you could lose money.
- Your annuity contract may contain provisions for a
guaranteed* death benefit or other payout upon the death of the annuitant. (The
annuitant provides the measuring life used to determine the amount of the
payments if the annuity is annuitized. As the annuity owner, you're most often
also the annuitant, although you don't have to be.)
- Just as you may choose how to allocate your premiums among
the subaccount options available, you may also select the subaccounts from
which you'll take the funds if you decide to withdraw money from your annuity.
- If you make a withdrawal from your annuity before you
reach age 59½,you may have to pay a 10% premature distribution tax on the
taxable portion of the withdrawal, unless an exception applies.
- After age 59½, you may make withdrawals from your annuity
proceeds without incurring any premature distribution tax. Since annuities
funded with after-tax dollars have no minimum distribution requirements, you
don't have to make any withdrawals. You can let the account continue to grow
tax deferred for an indefinite period, subject to limits specified in the
- To obtain a guaranteed* income stream for life or for a
certain number of years, you can annuitize, which means exchanging the
annuity's cash value for a series of periodic income payments. The amount of
these payments will depend on a number of factors including the cash value of
your account at the time of annuitization, the age(s) and gender(s) of the
annuitant(s), and the payout option chosen. Usually, you can't change the
payments once you've begun receiving them.
- The tax you pay on withdrawals (at your ordinary income
tax rate) depends, in part, on whether the annuity is funded with pre-tax or
* All guarantees are subject to the claims-paying ability and financial strength of
the issuing company.