Variable annuities (VAs) are preferred for investment for reasons such as the deferring taxes on profits, the facility they offer to name beneficiaries and avoid probate, as well as the growth possible inherent in the managed sub-accounts. These are all features of the accumulation phase when your balance grows. Every variable annuity company provides a prospectus which details every feature of the specific variable annuity. You should carefully consider the investment objectives, risks to your capital, charges, and expenses involved in variable annuities ahead of investing in it and its sub-accounts.
Eventually, it will be time to remove money, to take distributions form the variable annuity company. Once the annuity policy holder is ready to start removing income from the contract, he can opt for life-time income payments, should that be desired. The challenge in the case of variable annuities is that the long term income is unknown at the time you make your investment. This is because value of the annuity form which the income will come depends on the investment performance of the sub-accounts that you have selected. However, people can utilize an important choice to help plan a predictable income.
By opting for the Guaranteed Minimum Payment (GMP), a feature widely offered by most any variable annuity company, the investor will receive at the very least a specific sum as income month after month, regardless of market fluctuations and results in the sub-accounts. Additionally, if the investment in the variable annuity increases, the future monthly income rises as well.
Your GMP is calculated differently from one annuity company to another. One method used is to select from the greater of:
a) The original investment in the variable annuity purchased, compounded in 6% a year, or
b) The greatest account balance achieved on any anniversary date of the variable annuity inception
The annuity company will use one of the above balances, although a hypothetical accounting calculation, to determine the balance from which income will be provided.
Yet another version in use by at least one variable annuity company of the GMP promises that long term payouts will be at least some percentage, such as 80%, of the 1st payment. For example, if the first income payment is for $1,000 (which is based on the market value of the annuity), future withdrawals will at least be $800, regardless of future performance of the sub-accounts.
Before you select a variable annuity company, a specific variable annuity contract or decide if the GMP rider is worth the extra cost involved, contact an investment representative who can compare and offer several competing contracts and provide independent advice. Your first questions might be, "how many variable annuities do you offer and from which annuity companies?" A follow up question would be "do you recommend taking the GMP rider and why?"
If you don't get responses that indicate you are dealing with someone knowledgeable in these products and the different VAs from one annuity company to the other, find a different representative.
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