Variable Annuities: Are They Right for You
Variable annuities can be a valuable part of a Doctor's Financial Plan when used right.
Variable annuities are complex financial products that combine elements of insurance and investments. Here are five important concepts to understand about variable annuities:
Variable nature: Unlike fixed annuities, variable annuities do not offer a guaranteed rate of return. Instead, they allow you to invest your premiums into a selection of investment options, typically mutual funds. The performance of these underlying investments determines the value of your annuity.
Investment risk: Variable annuities carry investment risk, meaning the value of your annuity can fluctuate based on the performance of the underlying investments. While they offer the potential for higher returns compared to fixed annuities, there is also a possibility of losing money.
Death benefit and living benefit riders: Variable annuities often come with optional riders, such as death benefit riders or living benefit riders. A death benefit rider guarantees that your beneficiaries receive a certain minimum amount, typically the amount of your premiums or the account value at the time of death. Living benefit riders provide a guaranteed income stream for life or a set period, regardless of how the underlying investments perform.
Tax-deferral advantage: One of the main benefits of variable annuities is the tax-deferral feature. While the money is invested within the annuity, you won't pay taxes on any investment gains or income, allowing your investment to potentially grow faster compared to taxable accounts. However, when you start taking withdrawals or annuitize the contract, the earnings will be subject to ordinary income tax.
Fees and expenses: Variable annuities often come with various fees and expenses, including mortality and expense charges (M&E), administrative fees, investment management fees for the underlying funds, and optional rider fees. These costs can significantly impact the overall returns of your investment, so it's essential to carefully review the fee structure before purchasing a variable annuity.
Before considering a variable annuity, it's crucial to assess your financial goals, risk tolerance, and understand the full details of the contract. Variable annuities are not suitable for everyone, and in many cases, there may be more cost-effective investment options available to meet your needs. If you're unsure about variable annuities, seeking advice from a qualified financial advisor can be beneficial.
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