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Annuities:
An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a guaranteed minimum amount, such as your total purchase payments.

There are generally two types of annuities—fixed and variable.

In a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing. The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

The strengths behind fixed annuities are directly related to the strength of the issuing company. Consumers take no risk for as long that the issuing company stays financially strong.

Consumers wishing to withdraw funds from any annuities prior to age 59-1/2 may be subject to a 10% federal income tax penalty, and surrendered fees by the issuing company.

Features:
No contribution limits (if funds are non-qualified)
Principal and interest amounts guaranteed by the issuing company
No surrendered charges after the term period is over
Avoid probate

Benefits:
Interests compound on a tax-free basis
At maturity, a wide range of income options are available
For non-qualified funds, no contribution limits
Some annuities offer flexible premium options
Guaranteed interest rate regardless of market or economic conditions

In a variable annuity, by contrast, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you will eventually receive, will vary depending on the performance of the investment options you have selected.

Variable annuities usually have more features, and higher fees than fixed annuities and offer a wide range of investment options very similar than mutual funds, these options within the variable annuity are called sub-accounts During the accumulation phase, the annuitant can transfer funds from one investment option to another one within the variable annuity. .

Variable Annuities Sub-Accounts

The difference between mutual funds and variable annuities’ sub-accounts is that with variable annuities, investors will not be taxed on investment income and gains while transfers between sub-account are made during the accumulation period. If the annuitants incur too many transfers between sub-accounts, the annuitants may be assessed fees for excessive transfers. When the annuitants start withdrawing funds out of the variable annuity during the payout period, or any other time, the annuitants will be taxed on the earnings as ordinary income instead of the lower tax rate of capital gain rates.

Variable annuities, offer, in addition, to a wide range of investment options, fixed accounts that guarantee both principal and interest. These options give the annuitants the opportunity to divide the investment made between low risk options and higher risk options, all under a single umbrella called the variable annuity contract.

Many variable annuities offer asset allocation program to help investors decide where and how to invest their money among the variable annuities sub-accounts.

Fees in Variable annuities

Variable annuities have more fees than fixed annuities. Fees may include annual contract charges which cover administrative expenses and surrender fees, mortality expense (M&E) fees, surrendered fees, risk expense fees, fees associated with the management of the sub-accounts, fees associated with the printing of the fund and the annuity prospectus. Fees will decrease the value of the annuity, thus, the returns, and gains on the investments inside the variable annuities have to be high enough to offset all of these. However, the benefit of tax deferral will outweigh the costs of the annuities only if you hold the annuities as a long term investment.

In variable annuities all important information are explained in the prospectus. The prospect us must be given to you when considering purchasing a variable annuity.

Performance of Variable annuities

When investing in variable annuities, the performance on the underlying sub-account is primordial.

Variable annuities have been in existence only very recently, and many have little history regarding their performances. Many variable annuities are using mutual funds as sub-accounts, and that is key. Many variable annuities enter in partnership with mutual fund companies because mutual funds have longer past histories with regard to the performances of their funds.

When investing in variable annuities, annuitants control where the funds in the contract (sub-accounts) will be invested. Within the limits of the annuities investment divisions, annuitants can be as conservative or aggressive as annuitant wish to be. This offers the potential for higher returns, but higher returns means higher risks.

Death Benefits in Variable annuities

Variable annuities have a death benefit feature. If the annuitants were to die prematurely, the beneficiary (ies) would received the higher of the amount in the variable annuity (minus any withdrawals), or the guaranteed minimum (minus any withdrawals).

Some variable annuities offer annuitants the ability to lock the gains at the end of a period (usually on an annual basis). For example: if the annuitant purchased a variable annuity for $50,000, and at the end of the year, the value of the annuity is $55,000, the annuitant may be allowed lock the gains. The new basis and death benefit will be set at $55,000, no matter what are the market conditions. The purpose of this feature is to lock the gains, and protect against future market declines.