 Personal Finance PowerPoint Presentation, immediate variable annuity. Prepare to get financially fit by practicing personal finance. Most of this information can be found at Investopedia Immediate Variable Annuity, which you can find online. Take a look at the references, resources, continue your research from there. This by the Investopedia team updated October 31st, 2021. In prior presentations, we've been taking a look at insurance in general, moving then to the life insurance, keeping in mind the two major categories of term, life insurance, pure life insurance, and the permanent life insurance. Now we're moving on to annuities and thinking about what is an immediate variable annuity? An immediate variable annuity is an insurance product for which an individual pays a lump sum upfront and receives payments right away. So when we think about an annuity just in general, we think about basically a series of payments. Now, oftentimes that series of payments when we think about just an annuity are the same amount, but in this case, we've got a variable annuity. So we're gonna have a series of payments that are gonna be variable and we're gonna be putting the money upfront, a lump sum, in order to receive a series of payments that will be variable and we're gonna start to receive them immediately. So that's the general idea. So from an investment kind of strategy or retirement strategy or insurance strategy, we'd be saying that I'm gonna put this lump sum of money down so I can receive a series of payments in the future from it or off it and I'm gonna start that payment happening immediately and they're gonna be variable payments. So the payments from an immediate variable annuity continue for the lifetime of the annuity holder. So in that case, you might ask, well, how in the world can that happen? How much do I have to give right now in order to get payments for my entire life? Well, of course, the company, like the life insurance companies or the insurance companies are gonna have to basically use actuarial tables. So this is where it comes into the estimate to think about how long you're going to live, which for one individual, they can't really do that well, but if you have a whole bunch of individuals that are in a pool, then they can start to use those big number of calculations to determine what the likelihood payouts will be for these kind of annuity calculations and therefore figure out how much the lump sum payment would have to be upfront for them to be a profitable business and compete with other businesses that are doing this kind of work. So, but the amounts fluctuate based on the underlining portfolios performance. So that's where the variable component is. So we've got the underlying portfolio and then this variable component based upon that. So how an immediate variable annuity works? How's it put together? The immediate variable annuity is unique because most annuities have payouts that begin after an accumulation phase and end at a specified age. So in other words, it's the normal kind of annuity. You're going to put money in and you might give it time then to increase in value over time for it to grow, hopefully over time. And then you often will have a specific time where the annuity will end and that gives a lot more determination in terms of exactly what is being invested in and it's easier on the insurance company though it's taken on less risk on the insurance company side because they can give an exact calculation of what exactly kind of is happening basically upfront if they have this ending date with it. If you're going to say that it's going to vary, that annuity is going to vary and it's going to start to pay off upfront and it's going to go for your entire life. You've got some more factors that are going to have some unknowns that you're going to have to use some estimates for. The immediate variable annuity skips the accumulation phase by requiring the holder to contribute a lump sum after the annualization phase begins. Immediate variable annuities are not typical but they can be a wise investment when an investor is older and concerned that they might outlive their savings. So we might be older, we might be saying, hey look I'm going to live longer than possibly I expected. I want to stretch the savings out a bit possibly by putting it into an annuity. You may be able to get a little bit more out of the mileage of the nest egg. So immediate variable annuities carry the same risk as normal variable annuities because the payouts vary and may fall when the value of the underlying assets drop. So they're going to be tied to the underlying assets and so it's going to be dependent in part then on the performance of them. So however, the payments may also increase if the investment performs well. So clearly with the risk comes possible more reward because if the investments do well then that would be good. And the return might even beat the cost of inflation. So this is not the case for fixed annuities that pay the investor the same amount each month. So when you have a fixed annuity then as the name suggests, it's fixed and everything is kind of known upfront which means you're taking on less risk which is good but you're not getting the exposure to the higher ends of things because obviously risk and reward typically can go in the same direction, right? With the more risk you have the potential to possibly have finding things that could have a potential for more reward. So the difference between an immediate variable annuity and a standard variable annuity is that the former lacks an accumulation phase instead for an immediate variable annuity the period is compressed into one lump sum investment which introduces the risk of the market timing. If the investor buys an immediate variable annuity at the height of a bull market for example so everything's been going well and you buy at the height of the bull market for example future income will drop as the market reverts to the mean. In other words, the market was overheating it was outperforming and then if you would expect it to move back down and that would be not good obviously because your annuity is tied to the underlying investments. So this could mean that the annuity holder is unlikely to see a sizable return on the variable portion of the annuity. Obviously no one knows if it's gonna be really a bull market maybe in like long-term perspectives but no one knows exactly, you know the tips and the peaks and valleys of the market overall or from day to day or from a short-term perspective at least immediate variable annuities versus immediate fixed annuities immediate fixed annuity payments will not change if the market takes off after the initial lump sum investment because the annuity provider guarantees the payments. So if they guaranteed the payment then the payment is what it is everything's locked in upfront. So some providers of immediate variable annuities will also guarantee a percentage on the variable portion but higher fees typically accompany these guarantees. A general rule for annuity investments is the greater the guarantees the higher the price. So if they're gonna be tacking on the guarantees then it's gonna be more costly most likely. So 401ks and IRS typically use immediate annuities immediate variable annuities do not offer the tax advantages of other retirement accounts. For example, before tax retirement plans such as 401ks allowed individuals to defer taxes on investment gains and reduce their current taxable income. However, immediate variable annuities offer consistent income until death with a potential bonus on top depending on the underlying assets performance.