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Introduction to Variable Annuity

When an annuity is exposed to investments then it is referred to as a variable annuity. The latter pays its users a variable rate of return. On the other hand, fixed annuities have fixed rates of return. In order to make a good decision on whether you should invest in a variable annuity or not you should make sure that you have the needed knowledge for making an educated decision.

Variable Annuities vs. Fixed Annuities

Traditional fixed annuities and variable annuities share some common features. For example, you can get lifetime payouts, tax-deferral as well as guarantees. However, they differ in the investments that are included in the annuity itself. Variable annuities give you the opportunity to invest in stock and bond mutual funds. The name of the variable annuity has come from their nature. It implies that the returns on the investments in the annuity will define the returns on the annuity.

As a result, you are deprived of the certainty about the future returns on the annuity. On the other hand, fixed annuities give you the comfort of predetermined return.

Deciding on whether to invest in a variable annuity or a fixed annuity depends on different factors. Most people tend to prefer investing in a variable annuity because they want to take advantage of the potential for more growth as compared to the one of fixed annuities. Additionally, variable annuities are preferred due to the flexibility that most of them have started to offer. However, you should be also willing and able to take higher risk.

Variable Annuity Fees

Variable annuities have many benefits, but they don't come for free. There are a number of costs associated with variable annuities. One of them is administrative expenses. You will also incur mortality and expense charges, rider charges and underlying investment charges.

The amount of these charges varies from one annuity to another, usually depending on the features included in the annuity. The more features the annuity has, the higher the costs become.

If you need these features, only then you should pay these charges. Otherwise, do your best to evade them. It will be much cheaper to invest directly into a mutual fund when you don't need the benefits offered by the annuity. However, you should incur the costs if you need the provided benefits.

So, before purchasing a variable annuity see whether it suits your needs and wants. This means that you should check the features offered. Additionally, look at the reasons why you are offered a variable annuity instead of a mutual fund.

In order to get the most useful information you should read the prospectus of the annuity. Read it carefully to see the details on the riders, expenses and the surrender features that are included in the contract.

Finally, you should have in mind that for a variable annuity to wok, it should have all of its components working in the right way.  

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