SECTION IV: INVESTMENTS

Variable Annuities

A variable annuity is a contract between an investor and an insurance company whereby investors purchase a variable annuity with a single lump sum payment or through a series of payments. In return, the insurance company agrees to make payments to investors at some future date. Variable annuities accumulate capital over a period of time, and then distribute capital over a period of time or, an investor's lifetime.

• Accumulation Phase

  During the accumulation period, variable annuities provide the investor with tax-deferred accumulation, combined with the growth potential of the underlying portfolio options. Typically, inside a variable annuity there are a variety of portfolio options for investors to choose from.

• Distribution Phase

  During the distribution period, variable annuities can provide the investor with a guaranteed regular income (based on claims-paying ability) for a period of time, for the investor's life, or the life of any person the investor designates, such as a spouse. When investors start receiving payments from the variable annuity as withdrawals, they will pay ordinary income tax rates on earnings instead of the lower capital gain rates. However, if the investor chooses to annuitize the contract, an "exclusion ratio" applies, and a portion of each payment will be non-taxable as a recovery of cost basis.

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