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Variable Annuities

Variable annuities offer buyers a range of investment choices.
Variable annuities provide many of the benefits of fixed annuities including tax-deferred earnings and a choice of payouts, plus the opportunity to make a potentially unlimited contribution if the annuity isn't part of an employer's retirement plan, tax-sheltered 403b plan, or an IRA. In addition, variable annuities offer the potential for greater returns and the opportunity to make your own decisions about how to allocate your assets among investment categories. With variable annuities, lots of things can vary, or change: how your contributions are invested, the rate of return that you earn on the separate account funds that you select, and the amount of income you receive if you annuitize. What remains constant with all annuities, fixed or variable, is the opportunity to select guaranteed lifetime income.
How variable annuities work


You allocate your money among the underlying funds available through the separate account of your variable annuity, also called investment portfolios. These funds are like mutual funds and are either designed specifically for the annuity company or are versions of retail funds designated for exclusive annuity use. But while the names of the investment portfolios may be the same or similar to those of retail mutual funds, they are not the same funds.
UNDERLYING INVESTMENTS The performance of your annuity as a whole is based on how the underlying funds available through the separate account of your variable annuity perform. These underlying funds have underlying portfolio investments as well, such as the stocks or bonds they own. It is the performance of the underlying portfolio a fund owns that determines the performance of the fund.
Your job is to choose among the underlying funds available through the separate account of your variable annuity, much as you would with a 401(k) or 403(b) retirement plan or individual retirement annuity. Typically there will be a dozen or more funds, usually including stock funds, bond funds, a money market fund, a fixed interest account and the separate account funds that are offered. Sometimes, you have an even wider choice drawn from a number of different investment management companies.


You can allocate your money however you like, usually on a percentage basis. For example, you might put 50% in a growth stock fund, 25% in a balanced fund, and 25% in a money market fund - or some other combination. Each time you add money, you buy a specific number of accumulation units, or shares, based on the unit value of the separate account fund you're putting money into. The accumulation unit value is the total value of the separate account fund divided by the number of existing accumulation units.
THEY'RE YOURS Variable annuities differ from fixed annuities in another important way. Your retirement savings go into individual separate account funds held in an issuer's separate account, rather than into its general account. The exception is any money you put in a fixed account. Your retirement savings in the separate account are shielded from the issuing company's creditors.


Variable annuities were introduced in 1952. Their history, like that of mutual funds and self-directed pension and profit-sharing plans, is directly related to the increasing responsibility individuals have for making their retirement financially secure.



When you add money to your variable annuity either in a lump sum or as incremental purchases during an accumulation period, you must decide how your assets are going to be allocated among the separate account funds you have chosen. With many variable annuities, you can allocate a specific percentage of your contributions to each of your separate account funds at the time you buy. For example, if you invest $40,000 and have selected four funds, you might buy $10,000 worth of accumulation units in each of the funds. Or, if you invest $400 a month, you would allocate $100 into each of the funds.

IN THE BALANCEYou can weigh the characteristics of fixed and variable annuities.
Variable Fixed
Greater potential returns Guaranteed returns
Various levels of risk No inflation protection
Choice of separate account funds Insurance company manager chooses investments
Assets in issuer's separate account Assets in issuer's general account


Variable annuities let you create asset mixes that you're comfortable with, either at different stages in your life or in different economic climates. This flexibility lets you share in the benefits of a strong stock market, for example, or move money into more stable funds if you're concerned about preserving your gains as you get closer to retirement. No one mix suits every investor, though many investors emphasize stock funds, since they have historically provided the strongest returns over the long term, and thus the greatest opportunity for growth, despite their volatility.

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