Variable Annuities – Explained
Today's video covers all the most frequently asked questions on Variable annuities.

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What is a Variable Annuity?
A variable annuity is a tax-deferred retirement vehicle. It is a contract between you and an insurance company. The insurer agrees to make periodic payments to you, beginning either immediately or at some future date. A variable annuity offers a range of investment options. The value of your investment will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three. These options are sometimes referred to as subaccounts.
How does a variable annuity work?
Variable annuities are used to accumulate funds for retirement. Once you reach retirement, you have several options to withdraw your funds, depending on the contract.
Here’s how a variable annuity works:
There are two main phases of a variable annuity, the accumulation phase and the distribution or payout phase.
Accumulation Phase:
During the accumulation phase of a variable annuity, you make either a single purchase payment or a series of purchase payments. Your contributions are invested in a portfolio of stocks, bonds, mutual funds, etc. These portfolios are also known as subaccounts. You can decide where to invest your contributions based on your risk tolerance. Dollar cost averaging is common with these types of annuities. ($25/50 dollars per month depending on the contract)
Distribution or Payout phase:
Once you reach retirement, you have several options to taking distributions, depending on the contract. Some of the normal distribution methods are:
Income payments
Lifetime – payments for life
Joint and survivor – payments for life for both you and your spouse
Period certain – payments for a certain period (10, 20 years)
Systematic withdrawals – you choose how much, and how often you take these (monthly interest)
Lump sum payments – you take it all as a lump sum
Variable annuity advantages (pros):
Tax deferred – no taxes due until you withdraw funds
Growth of your portfolio based on the investments chosen
Could potentially outpace inflation
Potential higher returns than fixed rate annuities
Variable annuity disadvantages (cons):
Investment risk - The investments you choose could decline in value, which could lead to lower payouts in the future
Surrender charges – Variable annuities are made for the longer term, and many have surrender charge (or early withdrawal penalties) of up to 15 years
Penalties – withdrawals before age 59 ½ will be hit with 10% penalties from the IRS
Fees – the growth of a variable annuity can be held back based on the amount of fees inside it. Some normal fees seen inside this type of annuity are sales commissions, ongoing management fees, and costs of insurance charges. We have seen many of this with fees over 5%.
They do not offer a guaranteed payout
How are variable annuity withdrawals taxed?
You do not pay taxes on any investment gains until you start withdrawals. The earnings grow tax deferred until withdrawn. Then they are taxed as ordinary income.
Death Benefits:
What if I die before I start taking payments from my variable annuity?
Most all Variable annuities pay a standard death benefit. The initial premiums deposited could be the starting point and would lock in as the death benefit. It could reset annually, to account for new highs in the account or new deposits, and not decrease except to account for withdrawals. Each account may have their own specifics on death benefits.
How are variable annuity death benefits taxed?
Beneficiaries of a variable annuity could pay income taxes or capital gains taxes on their benefits. Note, these do not have to go through probate,

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