Variable Annuities Explained in Simple Terms

Before committing to a financial product purchase, it is important for all investors to understand how such a product works. This is particularly an important prerequisite when dealing with variable annuities, which are commonly perceived to be associated with fraud and negative publicity. However, a person who thinks and decides rationally has no reason to be swayed easily by the negative press. When properly done, variable annuities explained in understandable terms can be a springboard for the right decision – especially when deciding whether it is suitable or not for one’s financial situation.

The main question most people have regarding variable annuities is whether or not these contracts lose value. Since annuities are typically accessed by people who have already retired and are looking for ways to invest their money, their timeframe to recover lost funding is shorter than that of younger investors. To illustrate, individuals who are in their 20s or 30s have more time to make up for their lost money than the middle-aged or elderly. Therefore, this is a function of time and not of ability.

The main factor that draws in retirees to fixed annuities is the fact that the behavior of fixed contracts is very similar to a CD. This means that with fixed contracts, there is a fixed and guaranteed return of investment. Therefore, there is less risk of losing money from the account. When you purchase lifetime income annuities as well, you can ensure that this fixed stream of income continues for the duration of your lifetime.

Fixed annuities are best for investors and retirees who do not have other stable sources of income. Alternatively, variable annuities allow investors to play with the stock market, with the added risk of losing value. If the portfolio is successful, there are significant gains to be made. However, if the portfolio fails, the annuity also loses value. It depends on the investor to make a decision whether the risk is acceptable and appropriate. If it is, then there is nothing wrong with choosing a variable contract. Before making this decision and acting on it, it is important that the investor is aware of how the variable contract functions, what the risks are, and what the possible consequences are on his/her hard-earned retirement income.

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