What is a variable annuity? A variable annuity is contract between the purchaser and the insurance company that can allow you to turn a lump sum of money (your principle) into a stream of income. The value of the variable annuity while deferred will vary depending on the performance of the investment’s sub accounts in which you choose to place your principle.
How does it work?
You’ll begin by putting down one lump-sum payment or a series of payments. You get to decide how to invest the money, usually by picking from a pre-selected list of investment subaccounts. The variable annuity’s value is based on the performance of the subaccounts, so your value increases if they go up and you could make money, or the value can decrease if they go down and you could lose money.
Benefits and risks of a variable annuity
Because the value of a variable annuity is based on subaccounts that can go up and down, you accept more risk in the value of the annuity in exchange for a potentially greater return.
Purchasing a variable annuity is a strategy to provide an income stream after retirement for people who are willing to shoulder the risk of market fluctuations. A properly licensed professional can help you review the terms so you know the features, benefits, limitations and fees associated with the variable annuity.