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Variable Annuity Plans

Annuities that pay a fluctuating payout or rate of interest to plan holders. The contributions made into the annuity are invested into a separate account of actively managed common stock.

There are many types of plans and funds to choose from. An annuity can offer investors a constant cash flow at retirement. Most are considered tax qualified and tax deferred.

The value and amount of payments going forward will be based on the value of the securities in the separate account. The number of units are fixed at the payout amount, with only the rate of return fluctuating from month to month.

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Insurance companies and financial advisor firms can set up variable annuities for individuals.


Diversification planning refers to the inclusion of a number of different investment vehicles in a portfolio in order to increase returns or reduce risk exposure. The variable annuity contract owner may diversify by including several different investment vehicles in a portfolio. By diversifying, the owner may increase the portfolio’s return or decrease its risk exposure. Variable subaccounts are diversified, of course, in much the way that mutual funds are diversified. However, the owner may provide further diversification by selecting multiple subaccounts in which to invest. Insofar as the variable subaccounts are negatively correlated, i.e. one tends to go up when another goes does, the diversifiable risk to which the variable annuity contract is subject is reduced. By reducing the risk to which the cash value is exposed, the separate account’s volatility is reduced.

Asset Allocation

The Asset allocation plan involves dividing one’s portfolio into various asset classes in order to preserve capital by protecting against negative developments while still taking advantage of positive developments. Although asset allocation is similar to diversification insofar as its objective is to reduce risk and preserve capital, asset allocation and diversification are not identical. The focus of diversification is on investing in various vehicles within an asset class; the focus of asset allocation is on investment in various asset classes. In the process of asset allocation, the contract owner divides his or her investment among asset classes, such as U.S. stocks, U.S. bonds, foreign securities, and so forth. This is designed to produce a mix of assets that is suitable for the contract owner in view of his or her risk tolerance, investment timeline, and investment objectives.

Variable Annuity Death Benefits

Although prospective purchasers of variable annuities typically seek the returns that may be obtained in the equities market, they respond positively to insurers’ offering certain guarantees. Among those guarantees that have gained considerable acceptance are death benefit guarantees.

Depending on the annuity settlement or payout option selected by the contract owner, a variable annuity payout guarantees a periodic income payment to the annuitant at specific intervals for a specified period of time. As we noted earlier in our discussion of annuitization options, the income may be paid for life or for a lesser period.

Unlike the periodic payments under a fixed annuity, the amount of each variable annuity periodic payment is not guaranteed. Instead, variable payouts may fluctuate up and down based on actual investment experience. (Some variable annuities offer contract owners a choice of fixed periodic payments or variable periodic payments while others offer variable accumulation but only fixed payouts.)

Insurers are not uniform in the amount of control granted to VA annuitants after annuitization. While some insurers permit the annuitant to direct how the annuity value is invested and permit variable subaccount transfers during annuitization, others do not. In the case of those other insurers, the value of the annuity is usually invested by the insurer in a variable subaccount comprised principally of stocks.

The amount of risk that the contract owner assumes usually depends on the variable subaccounts that he or she has selected. A variable annuity will usually offer a money market investment option that is very conservative and which offers a combination of high safety of principal and liquidity as the primary investment objective. Although such an investment option would offer smaller potential rewards than would other investment options, it may satisfy the contract owner’s need for safety of principal. In contrast, variable subaccounts that invest in stocks offer potentially greater rewards, but involve the risk of a loss of principal.

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