Variable Annuities: They're Not Just For Seniors

• Mark P. Cussen
• On 6:51 pm EDT, Wednesday October 7, 2009

Variable annuities can provide growth, income, diversification and living and death benefit guarantees. There are many different reasons why investors purchase variable annuity contracts, and the use of the features and riders available in the contracts will differ according to the needs and objectives of the contract owner. This article explores some of the objectives commonly sought after by investors in different stages of life and how variable annuities can be used to meet those needs.

VA Strategies for Young Investors
Investors in their 20s and 30s generally use annuities as ancillary retirement vehicles. High-income earners who are already making the maximum allowable contributions to their company retirement plans and IRAs often turn to annuities as another means of achieving tax-deferred growth. Investors who don't have access to employer-sponsored retirement plans may be attracted to the money management features and benefits offered in annuity contracts.

Investors younger than 40 should generally allocate most or all of their contract values in subaccounts that invest in stocks, since their time horizon is long enough to allow them to recoup losses sustained in the markets. The use of insurance riders may not be prudent at this point, as their cost will reduce the returns they receive inside their contracts accordingly.

Mid-Career VA Strategies
Contract owners in their 40s and 50s tend to need somewhat different features than younger investors. At this point in their lives, the balances in their retirement plans may be worth a few hundred thousand dollars, and the prospect of retirement is beginning to loom on the horizon.

The living and death benefit riders available in most variable contracts can make a big difference in how much money they have to retire on. Contract owners who pay for these riders can afford to invest their money more aggressively than they could otherwise, as the income that they receive from their annuities is usually based on the highest value that their contracts reach before they are annuitized. This protects them from adverse market conditions that can substantially reduce the value of their contracts just before they start taking distributions from them.

Appropriate Strategies for Seniors and Retirees
Those who are no longer working need to have income that they can depend on for the rest of their lives. The living and death benefits mentioned in the previous section can be even more valuable for older investors, especially those who depend heavily on their annuity distributions for their monthly income. The living benefits of most variable contracts will promise a payout that is based on a guaranteed rate of growth over the life of the contract, such as 5%. This amount is paid regardless of how the subaccounts in the contract perform - unless they outperform the guaranteed amount, in which case the payout is based on the larger actual amount of the contract.

Annuities can also be useful estate planning vehicles for older investors, especially those who are unwilling or unable to pay for trusts or other more complex estate planning tools. Although they may still be subject to estate taxes, the death benefits from these contracts pass directly to their specified beneficiaries without going through probate, just like IRAs, qualified plans, transfer-on-death accounts and joint accounts when one account holder has died.

Timeless Issues
There are a couple of instances where annuities can provide invaluable benefits regardless of the contract holder's age. Heirs who come into large inheritances can immediately invest the entire balance of the proceeds into a variable annuity and effectively shield all future growth from taxation until it is withdrawn. Unlike IRAs and qualified plans, annuities have no initial contribution limits. Someone who inherits $500,000 could therefore purchase a variable contract of that amount and allow it to grow tax-deferred until he or she reaches age 70.5.

But taxes aren't the only thing that annuities can protect investors from. They can also shield contract holders from creditors in many cases. The rules pertaining to this benefit vary somewhat from one state to another, but annuity contracts are usually exempt from attachment from creditors. (O.J. Simpson provides a notorious example of this. He lived on money he had in annuities after his judgment from his deceased wife's civil suit.) Workers of all ages who leave their jobs and have to roll over their retirement plans into an IRA also frequently choose annuities as their investment vehicles because of their money management services, such as dollar-cost averaging and portfolio rebalancing.

The Bottom Line
There are a number of reasons why investors use annuities to fund their retirement plans, including tax-deferral, exemption from probate and creditors, money management services and insurance riders. Of course, the features that benefit a contract holder the most will vary depending upon his or her age and circumstances, but variable annuities can provide many benefits for investors in all stages and walks of life.

Buzz up!