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What is a Variable Annuity?
A variable annuity is a contract between you and an issuer whereby you agree to give the issuer principal and in return the issuer guarantees you variable payments over time. While annuities are not insurance policies, they are issued by insurance companies.
Variable annuities enable you to invest in a selection of funds, called sub-accounts. These sub-accounts are tied to market performance, and often have a corresponding managed investment after which they are modeled, such as a mutual fund. Available choices range from the most conservative, such as money market, guaranteed fixed accounts, and government bond funds, to more aggressive such as growth, small cap, mid cap, large cap, capital appreciation, aggressive growth, and emerging markets funds. Some have as many as forty or more fund choices with ten or more managers, and allow you to switch between them at no cost and without taxes (although excessive changes to your contract could result in the imposition of a small fee, so be sure to consult your financial planner or prospectus if you are making regular changes).
Variable annuities are different than their fixed annuity cousins, which are invested primarily in government securities and high-grade corporate bonds, and offer exclusively a guaranteed rate, typically over a period of one to ten years.
An variable annuity is similar to a retirement plan in that you can fund it in a lump sum or a little at a time, and all capital in an annuity grows and compounds tax-deferred until you begin making withdrawals. Unlike retirement plans, however, there is no limit as to how much you can invest in annuities!
Variable annuities offer features and benefits such as enhanced death benefits, living benefits, and more. The large number of variable annuity products and their various features and benefits can make selecting the right one a confusing process. But in fact, there are only a handful of different types of variable annuities. Learn more about the living benefit and death benefit features of variable annuities.