Understanding Variable Annuities

Variable annuities have become one of the most popular vehicles for people looking to save for retirement. But before jumping on the variable annuity bandwagon. you need to determine what role, if any, variable annuities have in your financial future. The following overview takes a look at variable deferred annuities. WHAT IS A VARIABLE ANNUITY AND WHY BUY ONE?

Similar to a fixed annuity, a variable annuity is a contract purchased from an insurance company usually to accumulate funds for retirement. The money in the contract accumulates tax-deferred and can eventually be used to provide income at regular intervals for a specified period of time or for life. In addition, variable annuities allow you to decide where to place your money among a variety of investment options. and they offer a number of other features not available in a fixed annuity. VARIABLE ANNUITIES

Variable annuities combine the growth potential, investment flexibility, and diversification that you enjoy with many other investments, along with the annuity’s ability to defer taxes.

In addition to a Fixed Account with a guaranteed interest rate, variable annuities usually offer a choice of several different types of professionally managed variable investment portfolios – including stock, bond, money market, and specialty funds. You can allocate money among one or a number of these portfolios, depending on your investment objectives and risk tolerance level. Of course, the performance of these portfolios is not guaranteed, and the value of your account could go down. However, allocating assets among several investment options may reduce your risk and maximize your opportunity for higher potential returns over the long term.

Many variable annuities also offer the opportunity to transfer your money among the available investment options at any time, free of charge, so you can rebalance your holdings as your risk tolerance or your needs change. Today, some variable annuities even offer Dollar Cost Averaging and Automatic Asset Reallocation features. TAX ADVANTAGES

Variable annuity earnings also accumulate tax-deferred. With tax deferral, you don’t pay taxes on earnings while they remain in your account. Future performance cannot be predicted, but insofar as there are earnings, they only become taxable when withdrawn and then they are treated as ordinary income.

Because of this tax deferral feature, your money can grow in three ways – from earnings on your original principal amount, from earnings on the contract’s investment earnings, and from earnings on the money that you would have used to pay current income taxes. Also, since the earnings only become taxable when they are withdrawn, you can control when you receive your income and how much taxable income you receive each year.

In addition, until they are withdrawn, deferred annuity earnings are not used in the calculation to determine current taxes due on Social Security benefits. Under current tax law, up to 85% of your benefits could become subject to taxation, depending on your level of income. Earnings from most other vehicles — like CDs, municipal bonds, and mutual funds — are included in the calculation of what percentage of your Social Security benefits gets taxed.

Variable annuities also allow you to access your money through withdrawals. You can usually withdraw at least 10% of your cash value each year without incurring any company-imposed surrender charges. Withdrawals in excess of that amount may be subject to surrender charges during the first several years. Also, annuities are long-term savings vehicles and withdrawals of earnings are taxable as ordinary income. Withdrawals prior to age 59-1/2 may also be subject to a 10% IRS penalty tax.

Another popular feature of variable annuities is a guaranteed death benefit that protects your beneficiaries in the event of your death. The value of your variable annuity at death will never be less than the total of the premiums you paid, less any withdrawals. State-of-the-art variable annuities even offer a death benefit guarantee that locks in the gains of your contract every several years. This death benefit – step-upcan protect your beneficiaries during periods of market decline. MAKE YOUR DECISION WISELY

While variable annuities provide a sensible solution to many retirement needs, be sure to do your homework. Make it a point to research the financial strength. industry reputation, and commitment to quality of the insurance company issuing the annuity, especially if you plan to put some of your money into the Fixed Account. Also, check out the individuals responsible for managing the variable investment options and the performance of those investment options.

Variable annuities may be sold only by individuals licensed to sell securities. These individuals must provide you with a booklet, called a prospectus, that contains complete information about product, including charges and expenses. You should read the prospectus carefully before investing your money. Keep in mind, lower fees are not always an indication of a better product.

You have worked hard to enjoy your retirement and it’s important that you choose an insurance company that offers a product that provides for your specific needs.

For more information about variable annuities, please contact Tanya S. Hammersmith at 1-630-830-2481 TTY/FAX, 1-800-383-2198 TTY (outside Chicago suburbs), or e-mail thammersmith@attmail.com.