Variable annuities are gaining popularity as a funding vehicle for qualified retirement plans. But why would an investor want to put one tax deferred vehicle inside another one? Variable annuities offer much more than tax deferral. Additional benefits include continued income flow even if you exceed life expectancy levels, guaranteed death benefits and expense charge guarantees.
Increasing life spans combined with exponential increase in health plan premiums mean a high likelihood of retirees outliving their savings. Inflation makes it even more certain that any payments guaranteed based on today’s rates are unlikely to fully cover future needs. Since variable annuities base the amount of retirement income payments on the performance of linked equity funds, these payments will increase and balance out inflation as time goes by.
Guaranteed purchase rates are also a valuable benefit provided by variable annuities, considering the changes in the economy over any extended period, the insurance company’s business costs and changes in life expectancy with improvements in healthcare. Thus, an increase in life span during the accumulation phase may provide larger monthly payments with variable annuities as compared to current and immediate annuity rates. Conversely, if the current rates are more favorable than the guaranteed purchase rate, then the contract holder can annuitize using the favorable rates. Thus, a variable annuity provides the best of both worlds – Secure payments and guaranteed higher rates of return.
Guaranteed death benefits to variable annuity holders stipulate that if the contract holder passes away while still in the savings, or accumulation phase, the beneficiaries get at least the amount invested or the cash value at the time of death. Most insurance companies lock in gains every year, and if so, the beneficiaries will likely get the enhanced value. Therefore, this provides another assurance against inflation to a variable annuity holder.
Expense charge guarantees made by the insurance company to the annuity holder specify that the annual and other charges connected to the account will never increase, even as the costs of running the insurance company go up every year. This provides another additional safeguard to the cash value of the annuity over an extended period.
Variable annuities nested within a qualified retirement plan provide a unique combination of lifetime income, death benefits to your family, frozen expense charges and a flexibility to invest in the best performing assets, the combined effect of which is not only to secure your future, but also allow you to spend the rest of your life without any downward shifts in lifestyle.