The concept of variable annuities with guarantees is an up-gradation in the usual variable annuities. In the following paragraphs, the meaning and a small explanation of such guarantees has been provided. As an opening statement, let me state that assured guarantees have made the usual variable annuities worthy of making the investments. The best use of annuities is for retirement planning and the best merit is that the returns are many times income tax-free.
An annuity in a broad sense is an investment instrument that in many cases is termed to be a life insurance. The annuity is principally, a financial instrument that is sold by a financial institute which accepts periodic payments from annuitants, and provides for the returns on the basis of the annuity contract. The returns are of course greater than the invested amount.
A peculiar pattern of returns that is observed in an annuity is that the returns go on increasing with passing years and in some cases, upon the demise of the annuitant, a beneficiary, who has been nominated by the annuitant, gets certain returns. An annuity is thus considered to be a bit shorter (by the virtue of time), cheaper and viable option by many people as compared to the usual long and cumbersome life insurance. So that was annuities explained in simple manner, let's move on to the variable annuities.
About Variable Annuity
There are two types of annuities that are provided by financial institutions, namely, the fixed annuities and the variable annuities. The fixed annuities provide a fixed rate of return that is mentioned in the contract. The payments and returns go exactly as planned and are not affected by any market projections and portfolio performances.
The variable annuities on the other hand have a guaranteed or assured return. The other portion of the annuity is basically based upon the different market performances and portfolio projections. The positive cum negative factors thus can be summed up, the annuity will give a great return if the market conditions are good but on the other hand if the economic conditions of the market conditions are not in order, the variable annuities will not yield great returns.
In the recent times, there have been an equal number of pros and cons of variable annuities, hence some financial institutes have started the concept of guarantees.
Are Variable Annuities Guaranteed?
A short answer to this question is that, yes, indeed, there are some variable annuity guarantees that investors can rely on. Here are some guarantees, that one can have in case of a variable annuity:
- In case of the annuitant's demise, the proceeds are forwarded to a nominee. The returns are a fixed rate and in some cases they go on for a particular time period whereas, there are some exceptional policies where the returns extend till the lifetime of the nominee.
- The Guaranteed Minimum Income Benefit (GMIB) is a standard part of almost all variable annuities, i.e. a parts of the returns is guaranteed. In some cases, the return rate is also guaranteed by the institute.
- Another great one is the Guaranteed Minimum Withdrawal Benefit (GMWB), where a small portion of the annuity can be withdrawn by the annuitant after every few years.
Thus the conclusion is, take your pick, get a combination of several such variable annuity. I would also recommend you to calculate your returns by adding them up and then dividing them by the number of years.