Variable Annuity

Contemporary, older investors often worry about the eventuality of outliving their asset and ultimately finding themselves in financial trouble at old age. These fears are to a great extent justified, as several people today live for two decades or more post their retirement. This is the reason why certain individuals choose to invest in a variable annuity plan in order to avail a fixed stream of investment income, along with tax-deferred growth.

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Variable annuities are a type of investment vehicle that enables you to make your choice from a range of investment, and ultimately pays you a certain amount of income in your retirement, which is determined on the basis of the performance of the investments selected by you. 

What are Annuities? 

Annuities essentially are a chain of periodic payments that have to be made from time to time, to ultimately create a lump sum corpus. Annuity plans are designed to provide regular payouts or income to individuals subsequent to their retirement, so that they can live independently and meet their expenses at old age, without a problem. Annuity plans provide assurance to the individuals that even in the scenario that their other assets are depleted due to certain reasons; they can always depend on this investment vehicle to provide a consistent source of income. 

The world is extremely uncertain, and no one knows what eventuality he or she may have to face tomorrow. Moreover, living expenses keep rising with every passing day, and meeting them without a proper income source can be extremely difficult for people. In such a situation, annuities come as a huge help. There are several types of annuities offered in India, which one can opt to invest in, as per their financial goals, budget, and priorities. Typically, annuities are considered a type of insurance in the country, rather than being an investment avenue. 

How does a Variable Annuity Plan Work? 

Deferred, variable annuity plans involve two phases, the accumulation stage, and the payout one. 

  • Accumulation Phase: In this stage, your contract shall increase in value and you would have to make the initial deposit needed to make the annuity purchase. You may specify the way you would want to invest in your funds in the accumulation stage. In the case of certain variable annuities, there can also be the option of investing your funds in a fixed-interest account. Even though the interest rate might change, you shall be able to avail a definite minimum interest rate under this option. Prior to deciding on exactly how to invest your funds, it is prudent that you go through all the available options properly. Over a span of time, your money may grow or decrease as per the performance of the funds in which they have been invested. 
  • Payout Phase: Also referred to as the distribution phase, under this stage you might receive your funds, along with any gains either on a lump-sum basis or as a stream of variable payments. There can also be a choice of designating how long these payments shall last. They might be for a span of a few years, or even for an indefinite period, such as your whole life. On the basis of your contract, you might also get to select adjustable or fixed payments that might change, based on your investment portfolio performance. 

Advantages of Investing in Variable Annuity

  • Probable hedge against inflation: In case your portfolio ends up performing well in the market, you may witness a good increase in your payouts. This shall put you in a better position to keep up with inflation.
  • Initial investment protection: Ideally, the annuity company does guarantee you with the aces to your invested funds, even if your portfolio performs poorly and you make no interest. 
  • Death benefit: In case you die prior to receiving payments from your variable annuity plan, your nominee or beneficiary shall get a payout from the annuity firm.
  • Lifelong payouts: Under such plans, you can get the option of receiving payments for your entire life, even if you end up exhausting your principal investment. However, you may also have to pay a certain extra amount to avail of this option. 

Disadvantages of Investing in Variable Annuity

  • No guaranteed return: Unlike the fixed annuity plans, variable annuities do not provide any guarantee that you would be able to earn profits, fixed interests on your investment. By chance your portfolio performs poorly; the valuation of your annuity shall be impacted.
  • Complexity: Variable annuities are often complex to understand. There are many investors who face problems in grasping the understanding of its particular provisions. Other types of annuity plans are relatively straightforward. 
  • Surrender charge: In case you end up withdrawing the whole or even a part of the money of your annuity before allowed by the contract, you shall have to pay a withdrawal or surrender expenses. 

There are several companies in India that allow you to invest in variable annuity plans.

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