Variable annuities provide tax-deferred earnings and a guaranteed payment stream in retirement. You must first fund the annuity with a one-time deposit or a recurring series of deposits, also known as purchase payments. Your deposits will be invested in securities such as stocks, bonds and mutual funds, which may fluctuate in value over time. Variable annuities charge several types of fees, so you should carefully analyze the terms of the contract before committing to make a deposit.
Mortality and Expense Fees
If you die before the annuity finishes paying out, your beneficiaries may get a death benefit. The death benefit is usually limited to the amount you paid into the annuity before your death, but this depends on the annuity company and the parameters of your particular policy. If the death benefit is included in your policy, the annuity company will charge a mortality and expense fee to cover the associated risk and administrative costs. Mortality and expense fees may also fund the commission for the salesperson who set up the annuity for you.
Your annuity company may also charge a small fee for its time and expenses incurred while handling your account. The administrative fee may be a flat fee or a percentage of the annuity's value. Variable annuities may also pass on the management fees from the securities that were purchased as investments.
Extra features on your policy typically require an additional rider fee. For variable annuities, these add-ons usually focus on guarantees to offset the risk of investment losses. For example, an additional rider may guarantee minimum payments or allow you to lock in your gains after a specified period. If the investments in your account lose value after this date, the annuity company must make up the difference. You may also be able to purchase riders for deposit bonuses or medical benefits.
Most annuities impose a waiting period before you may withdraw your funds. The period varies between companies, but it is usually between six and 10 years after opening the annuity. If you need to withdraw money before the waiting period expires, you must pay a surrender charge. The surrender charge typically decreases the longer you wait before taking a withdrawal. Some annuity companies also let you withdraw a small portion of the account without incurring a surrender charge.
Section 1035 Exchanges
A Section 1035 exchange allows you to cash out an existing variable annuity and purchase a new one without paying taxes on your gains. However, you must pay any applicable surrender charges on the existing annuity if the waiting period has not expired at the time of the exchange. You will also start another waiting period after opening your new annuity, exposing you to a second surrender charge if you need to withdraw your funds.
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