What Are the Benefits of Variable Annuities?

A variable annuity is a contract between an individual and an insurance company, structured as an investment account that can grow on a tax-deferred basis. It is designed for long-term savings, particularly for retirement, combining investment opportunities with certain insurance features. This financial product helps individuals accumulate and manage wealth over an extended period.

Potential for Investment Growth

Variable annuities offer investment growth by allowing contract holders to allocate payments among various investment options, commonly referred to as sub-accounts. These sub-accounts function similarly to mutual funds, investing in a diverse range of assets such as stocks, bonds, or money market instruments. The value of the annuity contract fluctuates based on the performance of these chosen sub-accounts, offering the potential for increased returns.

Individuals can select sub-accounts that align with their specific financial goals and risk tolerance, creating a customized investment strategy. This allows for diversification across various asset classes within the annuity. The potential for growth through market participation means that the annuity’s value can accumulate more significantly over time compared to products with fixed returns.

Tax Deferral

A primary benefit of variable annuities is the tax-deferred growth of earnings within the contract. This means that any interest, dividends, or capital gains generated by the underlying investments are not subject to taxation until money is withdrawn from the annuity. This deferral allows the entire principal, including accumulated earnings, to compound over time without being reduced by annual taxes.

The ability for earnings to grow untouched by current taxes provides a compounding advantage. Unlike taxable investment accounts where earnings are typically taxed each year, the funds in a variable annuity can continue to grow more efficiently. While withdrawals in retirement are eventually taxed as ordinary income, the benefit lies in the extended period of tax-free growth. This feature is beneficial for long-term wealth accumulation.

Lifetime Income Guarantees

Variable annuities can offer benefits through optional riders that provide guaranteed income streams for life. These “living benefits,” such as Guaranteed Lifetime Withdrawal Benefits (GLWB) or Guaranteed Minimum Income Benefits (GMIB), ensure a certain level of income regardless of market performance. These riders allow annuitants to receive regular payments for their entire lives, even if the underlying account value declines due to market downturns or depletion.

The income guarantee helps address longevity risk, which is the concern of outliving one’s savings in retirement. By providing a predictable and steady income stream, these features offer financial security. The guaranteed payments can supplement other retirement income sources, ensuring a consistent cash flow throughout an individual’s later years.

Death Benefit Provisions

Variable annuities often include a death benefit feature, providing financial protection for beneficiaries. This provision ensures that if the contract holder passes away, designated beneficiaries receive a specified amount. This amount is typically at least the initial investment, or a higher guaranteed value, even if the account has depreciated due to market performance.

The death benefit can bypass the probate process. By naming a beneficiary directly within the annuity contract, assets can be transferred more efficiently and privately to heirs, avoiding potentially lengthy and public legal proceedings of probate court. This offers financial security to loved ones.