Variable annuities are a preferred for investment for reasons such as the deferring taxes on income, the facility they offer to name beneficiaries and avoid probate, as well as the growth possible inherent in the managed sub-accounts. Variable annuities are sold solely by prospectus which details everything you need to know before investing. You should carefully consider the investment objectives, pitfalls, charges, and expenses involved in annuity payments just before investing in it and its root sub-accounts. To obtain the required information, make sure you call and request a prospectus. Most importantly, you want to understand how you will receive annuity payments.
Once the policy holder is ready to start receiving annuity payments, he can opt for life time income payments. The challenge in the case of variable annuity payments is that the upcoming income is unknown both at the time you made your initial investment and the time you annuitize (begin your lifetime annuity payments). This is because the stream of annuity pay,ents is based on
a) the performance of your sub-accounts to date and the account value at the inception of payments
b) future changes in the account value during your lifetime
This inability to forecast annuity payments is troubling for most retirees but there is at least one option to mitigate this problem.
By opting for the Guaranteed Minimum Payment Rider (GMP), the investor will receive a minimum annuity payment every month, regardless of markets fluctuations. Additionally, if the investment in the variable annuity increases, the future monthly income rises as well.
The GMP is calculated differently at various annuity companies. One method is to select the greater of:
a) Your initial investment compounded at 6% a year, or
b) The greatest account balance achieved on any anniversary date of the variable annuity contract
Once that figure from the above is determined, you would be guaranteed to get, as an example, .6% as your monthly annuity payment. Note that the above are not the actual value of your annuity contract, but rather, a hypothetical number used on which to calculate a minimum annuity payment for your security and peace of mind.
Yet another version of the GMP rider made available from companies providing annuity payments promises that potential payouts will be at least a specific percentage, such as 80%, of the initial payment. The initial payment will be based on the actual value of your account and the prevailing annuity rates at that time. For example, if the first check out is for $1,000, future annuity payments will at least be $800.
Before you invest in a variable annuity for which you will be relying on for annuity payments, contact an investment representative regarding details of annuity payments when using the Guaranteed Minimum Payment rider.