Pros and Cons of Variable Annuities Research Paper

Pages: 2 (771 words)  ·  Bibliography Sources: 2  ·  File: .docx  ·  Level: Doctorate  ·  Topic: Literature

Annuities and Mutual Funds

A variable annuity is an insurance contract by definition, which explains why they are almost always offered by insurance companies. In essence, a variable annuity has the insurance company guarantee a minimum payment early in the annuity, and then in the later stages the performance of the portfolio determines how much the payment will be (Investopedia, 2016).

The SEC cautions that there are a different types of variable annuities, and as such investors should take the time to understand the type of variable annuity that they are contemplating. Insurance companies promise to make payments to you over a set period, and these are annuities. Over the life of a variable annuity, the payment will vary. There will also be a death benefit attached to this, which is why insurance companies deal in variable annuities. They have the expertise to calculate the value of that death benefit, and a variable annuity is therefore a form of life insurance, but when where there is some payment while you are alive as well. The buyer of the variable annuity will first make payments to the insurance company during their working years, and this is the money that will be used later in life for the payouts back to the buyer. The insurance company therefore takes the buyer's money, invests it (typically in mutual funds) and then pays out to the buyer at retirement. Thus, variable annuities are a form of retirement saving, where the money is tax-deferred. The SEC cautions that a variable annuity should only be purchased after other tax-deferred investment options have been utilized (, 2016).

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The risk that the buyer of the annuity will outlive the benefit is covered by the life insurance component. This guarantees some sort of payout to the beneficiary if the account still has money in it. The insurance company will make its profit both on the fees for managing the investments, and also on the way that it prices the life insurance component.

Research Paper on Pros and Cons of Variable Annuities Assignment

There are some differences between variable annuities and mutual funds that should be understood by the consumer. The first thing to remember is that the variable annuity's performance depends on the performance of the money that has been invested into it. Thus, variable annuities almost always invest in a mutual fund portfolio. The… [END OF PREVIEW] . . . READ MORE

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How to Cite "Pros and Cons of Variable Annuities" Research Paper in a Bibliography:

APA Style

Pros and Cons of Variable Annuities.  (2016, February 16).  Retrieved December 4, 2020, from

MLA Format

"Pros and Cons of Variable Annuities."  16 February 2016.  Web.  4 December 2020. <>.

Chicago Style

"Pros and Cons of Variable Annuities."  February 16, 2016.  Accessed December 4, 2020.