Variable
annuities
do not have a predetermined rate of return.
Instead, you choose to diversify your premium among several investment
options offered through the contract, and your return is based
on the performance of the
underlying
investments
included in the
portfolio
you select.
Because the return is not guaranteed, a variable
annuity has a higher level of risk than a fixed annuity, but it
also has greater potential return. That’s because the investments
you choose could outperform the typically conservative investments
an insurance company makes to meet its obligation to make fixed
payments. Of course, your return could also be lower.
Variable annuities usually let you shift assets
among different investment choices without paying taxes on the
earnings you transfer, which means you can adjust your portfolio
in response to changing market conditions or your own financial
goals. The one exception may occur if you want to shift out of
a fixed income account within the variable contract. In that case
you may be charged what’s known as a market value adjustment
to compensate the company for having to liquidate assets to cover
your redemption.
Risk and Responsibility
Variable annuities give you a better chance of
beating
inflation
and protecting your purchasing power. However, once you begin
receiving payments, the size of your monthly check will vary,
which means you’re not able to count on a fixed amount of
money. Although your contract will probably specify the minimum
payment you’ll receive no matter how poorly your portfolio
performs, you could end up with significantly less income than
you expect.
