Variable Annuity

Table of Content

1. What Is a Variable Annuity?

2. How Does a Variable Annuity Plan Work?

3. Key Features of Variable Annuities

4. Advantages and Disadvantages of Variable Annuities

5.Variable Annuities vs. Fixed Annuities

6.Final Words

7. FAQs on Variable Annuity

What Is a Variable Annuity?

A variable annuity is a type of annuity plan where the insurance company allows you to invest in different assets, such as stocks, mutual funds, and bonds.

You can invest your money in a variable annuity either with a lump sum amount or through multiple payments over time. During the investment period, your contributions grow tax-deferred. Until and unless you make any withdrawals, no tax is applicable.

In future, when you start getting the payout, the annuity will become a source of retirement income. If you pass away before the payout phase begins, your beneficiaries may receive a guaranteed death benefit.

Among different types of annuity plans, this type of annuity helps you grow your retirement savings with the potential for higher returns through market-based investments. However, these benefits also come with the risk that your investment value may decrease if the market performs poorly.

How Does a Variable Annuity Plan Work?

The variable annuity plan works in two phases: the accumulation phase and the payout phase. Let us understand them one by one.

1. Accumulation Phase

During the accumulation phase, you build your retirement savings by making either a lump sum payment or regular contributions to your variable annuity. After deducting applicable fees, your money is invested in different types of market-linked options, such as mutual funds, stocks, or bonds.

The value of your account will fluctuate depending on the performance of these investments, the amount you contribute, and the fees payable. Many plans also allow you to allocate part of your funds to a fixed-interest account. This pays a steady and guaranteed minimum rate. The insurer may adjust this rate periodically.

2. Payout Phase

The payout phase starts when you choose to “annuitise” your contract, which means you begin receiving income from your variable annuity. You have the option to take your money as a lump sum or on a monthly basis.

The payout period you choose will be for the payments that are either fixed or variable. You can also decide whether you want fixed payments or payments that vary according to how your selected investments, like mutual funds, perform.

It is important that once you enter the payout phase, most annuity contracts do not allow you to make additional withdrawals beyond your scheduled payments.

This phase transforms your accumulated savings into a reliable stream of income. Thus, it helps you meet your retirement goals with either stable or market-linked payments.

A deferred annuity is another life insurance plan which is especially for your retirement. It provides you a fixed income from a date in the future as per your choice.

Key Features of Variable Annuities

Variable annuities come with features designed to combine growth potential with retirement security. This makes them a popular choice if you are looking for both investment flexibility and long-term income stability.

These are the key features of variable annuity explained:

● Tax-Deferred Growth

Earnings within a variable annuity grow tax-deferred. As you do not pay taxes on any investment gains until you withdraw funds, your money compounds over time without annual taxes. Taxes apply when you begin withdrawals.

● Flexible Investment Options

Variable annuities have a wide range of investment choices called subaccounts. It functions similarly to mutual funds. These options include equity (stocks), debt (bonds), and balanced funds that allow you to customise your portfolio as per your risk tolerance and financial goals.

● Optional Riders for Added Protection

Many variable annuities allow you to add optional riders for extra security. Some of the common riders are guaranteed minimum income benefits.

It ensures a steady income and loss protection features that can limit downside risk. The add-ons help provide peace of mind and enhance financial security. However, they usually come at an additional cost.

● Death Benefits

If you are planning to save money for your dependents, the variable annuity provides a death benefit feature for you. If the policyholder passes away before payouts begin, beneficiaries will receive at least the amount of purchase payments, or sometimes more, depending on the contract.

● Income Payout Flexibility

Variable annuities provide several payout options to help you after retirement. You can either get a lump sum or periodic payments (monthly, quarterly, or annually) or lifetime payments that help protect against outliving your assets.

Understand the basic features of annuity plans from HDFC Life to get help in decision-making.

Advantages and Disadvantages of Variable Annuities

Variable annuities can be an attractive choice for retirement planning, but it is important to understand both their pros and cons before making a decision. Follow this table to know the key benefits and drawbacks.