6 Differences Between Variable Annuities and Mutual Funds

The following is a guest post. Enjoy!

Investing your money today can bring you significant returns tomorrow. The key to maximizing financial growth is to put your money in the right investment program. Variable annuities and mutual funds are both viable options, but which one is better for you? To find the answer to this question, you need to understand the differences between variable annuities and mutual funds.

Here are 6 key differences:


Insurance Product vs. Investment Vehicle

  • Variable annuities are insurance products that you buy from an insurance company. Under a contractual agreement you contribute money, either through serial payments or in a lump sum, and the insurance company agrees to return the money back to you at a set time in the future. Meanwhile, the insurance company invests your funds in a series of mutual funds, otherwise known as subaccounts.
  • Mutual funds are investment vehicles in which a money manager collects your cash, combines it with other peoples’ cash, and invests it in stocks, bonds, and similar assets. Mutual fund programs give groups of people access to a diverse portfolio of securities they would most likely not be able to afford with their own capital.


Lifetime Payment Guarantee vs. No Guarantee

  • Annuity holders are promised a lifetime of regular payments once they reach their Payout Phase. Depending on market performance, the payments may be small or large, but they continue until death.
  • Mutual funds make no such guarantee. You might earn enough cash to support you for decades to come, but you might not. There are no insurance benefits to be had in a mutual fund plan.


Survivor Benefit vs. No Survivor Benefit

  • Annuity beneficiaries are guaranteed a survivor benefit in the event of an annuity holder’s death.  They receive whichever is greater, the sum of all the monies in the account or a guaranteed minimum payment for life.
  • Mutual fund programs do not guarantee a survivor benefit to beneficiaries in the event of a fund holder’s death.


Tax-Deferred vs. Taxable

  • Money earned by an annuity is not taxed until the money is withdrawn. This tax deferrment allows annuity holders to avoid paying the government for money they are not yet using. When the money is finally withrawn, it is then taxed at a regular income tax rate.
  • Money earned by mutual funds is taxable on a yearly basis. Tax on all dividends and distributed capital gains from mutual funds must be paid in the year the money is received. When the money is finally withdrawn, it is not taxed again.


Withdrawal Penalties vs. No Withdrawal Penalties

  • If you’re not yet 59 ½ and you need to get your hands on more than 10 percent of the accumulated cash in your annuity, you’re going to pay a tax penalty on that money. Money taken out of annuity before the standard 7-10 year surrender period is over comes with a penalty price tag, too.
  • If your money is tied up in mutual funds, you’re free to access it at any time without paying a tax penalty.


Long-Term Goals vs. Any Term Goals

  • Variable annuities are designed specifically for long-term retirement saving.  They don’t make people rich overnight, and a person who doesn’t have the time to sit around waiting around for funds to grow would be better served elsewhere.
  • Mutual funds are designed to serve both long and short term financial goals.


Major Fees vs. Minor Fees

  • Annuities are notorious for their extraordinary fees. The insurance company charges you a “mortality and expense fee” for the handling of your money. You also pay subaccount fees, insurance fees, and numerous taxes.
  • Mutual funds charge an upfront administrative fee. You also pay account mangement fees, purchase fees, and other assorted charges. Overall, the fees typically associated with mutual funds are lower than annuity fees.

Depending on who you talk to, one of these investment plans can seem a lot better than the other one.  In reality, both plans offer significant benefits and drawbacks.  Before entrusting your hard earned money to an insurance company or money manager, consult a financial advisor.

***Photo courtesy of http://www.flickr.com/photos/76657755@N04/7027604401/

Speak Your Mind


CommentLuv badge