Non term life insurance. Variable Annuity Definition Example, InvestingAnswers

How it works (Example):

Let's assume you put $300,000 into an annuity at age 60 and the insurance company offers to pay you $1,000 per month for the rest of your life. Annuity.

According to our math, you will have to live until age 85 to break even on the investment, and if you live past 85 the insurance company must continue making payments.

To invest in a variable annuity, the buyer makes an investment with the insurer and allocates this money according to a menu of mutual funds allowed by the contract. Some insurance companies also offer asset-allocation funds, which automatically allocate the money in a range of stocks, bonds, treasuries and other investments. The contract grows tax-deferred until the buyer chooses to receive payments ("annuitizes the contract"). Unlike investors who directly own mutual funds, annuity holders may switch in and out of funds and receive year-end distributions from those funds on a tax-deferred basis until the contract is annuitized.

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It is important to know that buyers cannot begin receiving annuity payments before age 59 1/2 without paying a 10% federal tax penalty. When payments begin, the contract's investment gains are taxed at the buyer's ordinary income tax rate. Some insurers allow buyers to make small emergency withdrawals without penalty. In some circumstances, buyers may also exchange an annuity tax-free for another annuity with a different insurance company, which is known as a 1035 Exchange and is governed by Section 1035 of the Internal Revenue Code.

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