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How do variable annuities compare to mutual funds?


A variable annuity is a complex investment vehicle that combines features of an insurance policy, an old-school defined-benefit retirement plan and a mutual fund. An annuity is a long-term contract with a life insurance company in which the owner, called the annuitant, makes payments regularly or in a lump sum. The money builds up tax free, usually for many years, and then the contributions and investment gains are used to pay income over the annuitant's remaining life, generally after retirement, and there is also a death benefit that gives a beneficiary whatever is left in the account or some other minimum amount.
An advantage of annuities is that owners can't outlive their money, so they can work well for people who live well past retirement. The main problem is that annuity expenses can be very high, compared to other investment vehicles. There are many different kinds of fees and charges, they are about as hard to fathom as annuities themselves, and if you do live a very long life, you will be paying these charges for a very long time. Many financial planners think they're not worth the trouble and expense. You might be better off holding mutual funds in a tax-advantaged retirement account and buying a separate life insurance policy. If you're worried about outliving your money, you could always consider a simpler lump-sum annuity when you retire.
-Conrad de Aenlle