What’s a variable annuity?

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Variable annuities are a structure for life insurance policies that are intended for the investment of the underlying assets in a portfolio. The idea behind the general life insurance annuity contract is to create a steady source of income for later in life. When the contract introduces the concept of a variable annuity-based payment, this changes from payments from a fixed amount to a variable amount.

When a variable annuity structure is offered for a life insurance contract, the portfolio that serves as the underlying asset for the offer typically consists of equity and debt securities. Securities have the potential to increase in value over time, thereby generating a higher rate of return for policyholders. When this happens, payments are adjusted to reflect the additional yield, which can be a nice bonus for the policyholder.

At the same time, life insurance annuity contracts that make use of a variable format can be somewhat risky. Just as the underlying securities can increase in value, there is also the possibility that the market will experience a recession. When this occurs, the variable annuity payment to policyholders will be reduced accordingly. However, it should be noted that any type of investment would carry a degree of risk. In general, providers tend to make use of underlying securities that have demonstrated a reasonable amount of long-term stability.

When entering into a variable annuity contract, there is the option to select from several different payment schedules. Payments can occur monthly, quarterly, or annually, once the terms of the contract are met. Most providers of this type of financial tool will include supporting documentation to show how the payment amount was calculated. This allows the investor to determine if the variable annuity plan is performing to expectations, or if a different type of agreement would be a better option.

Smart Asset.

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