Variable Annuity Life Insurance Explained

Annuities are seen primarily as investment vehicles that buy into the life insurance industry. These types of investments are particularly suited for those people who are over the age of 59 1/2 years old. There are two types of annuities that are offered by insurance companies. These types are fixed annuity life insurance and variable annuity life insurance.

An annuity works by an individual investing a set amount of money in a life insurance contract for a certain time frame. This time frame is usually between 7 and 10 years. During this time, the invested amount earns interest. The money is also tax deferred which means the investor does not pay taxes on the earnings from the investment until it is withdrawn.

A fixed annuity earns interest at a fixed rate that is guaranteed by the insurance company, regardless of whether the federal interest rates rise or fall. This rate is determined by a number of factors including the federal interest rate. For this reason, if the interest rate is fixed at a low amount, the investment might not keep up with inflation. In fact, there is a possibility that the investment will not be worth as much when it is withdrawn than when it was invested due to low interest rates.

Because of the potential for having a low rate of return when investing in a life insurance annuity at a fixed rate of interest earned, many people opt to purchase a variable annuity instead. This type of investment varies in the amount of interest paid. It is tied directly to the national interest rate, and as such, is subject to a variety of market fluctuations. There is a great potential for exceptional return with such an investment. Conversely, there is a chance that the investment will be worth less than the original amount invested depending on the market rates on the date of withdrawal.

Whether a fixed annuity or a variable annuity life insurance policy is purchased, there are now a number of options offered by reputable insurance companies to roll over the money into once the investment time frame has passed. It is important to carefully weigh all available options when exploring the world of investments and annuities.