With all of the instability in the economy, many beginning investors may be wary of any type of investment that is “variable.” The U.S. Securities and Exchange Commission offers explanations as to what variable annuities are and what information investors should know before purchasing variable annuities.

What are Variable Annuities?

Variable annuities are an integral part of many investment plans and retirement plans in America. This investment is a contract between an investor and an insurance company. The insurer offers to make “periodic payments” to you. Investors purchase a variable annuity contract. In order to do this, investors may make either a single purchase or a purchase through a series of payments. These investments are intended to be long-term investments. They should not be used to meet short-term needs.

What do Variable Annuities Offer?

Variable annuities offer several different advantages. On the one hand, there are periodic payments that are given out for the rest of the investor’s life. Death benefits are also a positive to this form of investment. The beneficiary is guaranteed to receive an amount that is usually at least the amount of the purchase payments. There is also the advantage that comes with these investments being tax deferred. No taxes are paid on the income or investments gained until the money is withdrawn.

What are the Two Variable Annuity Phases?

There are two different annuity phases: the accumulation phase and the payout phase. The accumulation phase occurs during the time in which you purchase the payments and allocate them into investment options. You can often transfer money between investment options without paying taxes on investment gains. But, withdrawing money may result in a charge.

Then there is the payout phase, in which you receive the purchase payments back plus any investment incomes and or gains. You can either receive it as a large lump sum or receive the money as a series of payments. Often this interval is monthly.

Variable annuities offer investment at varying risks, depending on the asset classes in which they are invested.