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What are variable annuities, and should your business invest in them?

A variable annuity is a contract between you and an insurance company that is usually associated with a retirement investment plan.The contract with the insurance company is there to protect you from a loss in capital on your tax-deferred investment vehicle. Because of the insurance the money gained in the account is not subject to annual taxation requirements such as are IRA's and 401k's.

Variable annuities can be immediate or deferred. With a deferred annuity the account grows until decide you want to make withdrawals (before age 59.5 there is an additional fee to make withdraws).At that time you can either "annuitize" your payments (annuitizing payments refers to when you choose to be provided with regular payments over a set amount of time) or you can withdraw money at will.


Fees associated with variable annuities

The average annual fee for a variable annuity is 2.08% of the total number of assets included in that annuity.When compared to the industry standard for the average mutual fund which falls at 1.38%, you can see that variable annuities are more expensive to manage. In addition to yearly feel variable annuities also typically include sub-account charges, surrender charges and annual contract charges.Surrender fees are also a problem.Surrender fees typically decrease with time but can be considerable if money is withdrawn from the account within the first few years.The average surrender fee is at about 6.3%.Now add to that an early withdrawal tax penalty of 10%.

Variable annuity death benefit

Variably annuities carry with them a death benefit that guarantees that your account will hold a certain value should you die before the annuity payments begin.In the even of the annuity holder's death the beneficiary is entitled to receive at least the total amount of money that was invested into the annuity.Critics of the variable annuity are quick to point out that simply receiving the amount invested into an account is much lower than had that money been placed in even a standard savings account.Unless you plan on dying and having a beneficiary who will immediately need your annuity, this benefit may not be worth the hype.Additionally, upon your death, your beneficiary will inherit all the taxes that you have deferred on your account.This is not the case with mutual funds although both are liable for federal estate taxes on any assets above the federal estate tax exemption mark.

Taxes

Gains in variable annuities are taxed at ordinary income tax rates while tax rates on long-term mutual fund gains and dividend income are considerably lower, at about half as much.This tax difference almost makes up for the appealing feature of a variable annuity's tax-free compounding.

The best variable annuity option


The best variable annuity option is one with low costs and good investment options.If you already own a variable annuity and are unhappy with the fees and tax situation that you are in, consider a tax-free transfer.Also referred to as a 1035 exchange, this transfer will give you a better quality, lower-fee annuity.

Should your business invest in variable annuities?

With all of the fees, tax disadvantages and unimpressive gains, variable annuities are not generally a good choice for a business investment.Investing money in more traditional retirement plans and mutual funds will not only yield the same if not higher gains but your money will not have to be spent mainly on fees and higher taxes.In a poll of financial advisors, council indicates that variable annuities are only wise options for a very small percentage of the population.It is best to carefully consider this option and speak with a financial and investment advisor before putting your money in a variable annuity.


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