Many people don't like annuities because they come with substantial fees. All types of investments come with some costs, however. Hence, dismissing annuities based on this is not a good idea. Rather, you need to understand the different fees associated with them, which are the surrender fees, the commissions, and the monthly fees. All of these are different depending on the variable annuity options you chose. Let's take a look at those options.
Understanding the Whole Story on Variable Annuity Options:
1.) Funding Options
Here, you use additional funds to increase the payout of the annuity that you initially set up. This can be done through:
- Single payments, which is the easiest way to do it if you have a lump sum of money.
- A series of payment, which allows you to increase the principle over time.
- Social security benefits, which mean you receive less benefits now, but you will have savings later.
2.) Investment Options
You can invest the funds from annuities in a range of markets. The variable annuity options for investment differ from one company to the next, who will explain their investment strategies. Some of the options are:
- Immediate annuities, whereby you see instant results. In other words, as soon as you pay in to your annuity, you will also start to get your monthly payment for the rest of your life.
- Fixed annuities, whereby the rate you received will be locked in place for a set amount of time (between one and 10 years), which gives you the guarantee of having a certain amount of money every month.
- Variable annuities, whereby what you are paid every month will vary depending on the return of your accounts. This offers the potential for a very high return, but equally for months with little to no payments.
- Equity indexed annuities, whereby the benefits of variable and fixed are combined, meaning that you may get more in certain months if the rates were good, but you will never get less than the pre-agreed amount.
3.) Payout Options
When you buy your annuity, you can choose how you want to receive your payments. The options are:
- A guaranteed period, which means you will get a set amount of payments and, should you die before those have ran out, your beneficiary will receive them.
- Lifetime payments, which mean your payments will stop as soon as you die, with no survivor benefits.
- Survivor payments, which is commonly chosen by married couples, as it continues for the lifetime of the holder and the lifetime of their spouse.
4.) Withdrawal Options
There are a number of different ways in which you can withdraw funds from your annuity. That said, if you do this before you are 59 1/2, you will have to pay some significant penalties and fees. The available options are:
- Annuitization, whereby the current value is translated into a range of payments, giving you guaranteed income for a certain period of time.
- Systematic withdrawal, whereby you decide when you get payments and to which amount. This means you can no longer have a lifetime guarantee, however.
- Lump sums, whereby you take out all of the value of the annuity, and you will be taxed on it as if it were ordinary income.