The process of how to allocate funds inside a variable annuity is not as straightforward as you might think. This is an investment tool that gives the control of what is invested in, for how much and the length of each investment in the hands of the investor. This is good if the person who is handling the investments knows what they are doing. On the flip side, you also have no one to blame if your investments turn sour.
Unlike the fixed rate annuities that will only return a predetermined amount for the investment, the variable annuity will differ. The economic conditions of the market and the choices that are invested in will determine the return on investment for this annuity.
When you are making an investment in an annuity with an insurance company and the type you specify is for a variable rate annuity, you then have to make a decision. This decision will be on what your investment dollars should be allocated into. The most common of these is the index annuities. These are tied to one of the large indexes, like the S&P 500.
With many of them in insurance companies, they already have certain funds you can allocate your money into. There are domestic stock funds for a variety of business sectors, there are bonds which will closely simulate
fixed annuity rates, and there are the international funds.
After you choose where your money should be invested, get in writing how often you can change the investment amounts around. Each insurance company is different and some have waiting periods. No matter how they allow you to move your funds around, be ready for a fee to be applied with each transfer. This might even be a double fee. Once for selling the investment and the other when you reinvest it. At no time will you be withdrawing the funds; this will all be handled electronically.
Each investment option you have with your annuity being provided by the insurance company will have a prospectus. Each one of them should be obtained for future reference. These prospectuses are in-depth reports on how the fund is managed, where the fund’s assets are allocated to, and the expenses of running the fund.
The risks of each fund are a section you should become very familiar with. This is where a judgment call has to be made on where you wish your money to go. The greater the risk, the higher potential for larger returns, but there is also a greater chance of losing on your investment.
Unless you already know about the funds with the insurance company, these prospectuses should be analyzed before you sign the contract and make your investment. Information is power. The greater the facts you have on how your money is going to be handled, the greater control you will have over your financial future.
If you ask the insurance agent for advice, some good ideas could be suggested. One thing you need to remember, they want to make as large a profit from your investment as possible. It is the reason they are in business. It is okay to listen to them, but never be fooled into thinking they are considering what is best for you above their own interests.
Knowing how to allocate funds inside a variable annuity is necessary so you can change where your money is invested according to the current market conditions. You need to judge the market conditions against the fees you will be charged for making any changes in your annuity.