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How does a variable annuity work?

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Many people who are thinking about retiring may feel a bit overwhelmed about all of the possible financial investments from which they can choose.

One possible option that is popular among many financial experts is a variable annuity.

A variable annuity is an agreement between the investor and a financial institution, usually an insurance company.

The investor makes payments of an agreed-upon amount up front to the institution. The investor is usually able to have some control over how the institution invests these funds, for example, in mutual funds, stocks, bonds or some other account.

In exchange, the institution agrees at an agreed-upon time to pay a stream of income to the investor either for a set number of years or until the death of the investor or one of the investor’s relations.

The idea is that the investor will get back what they paid into the annuity plus a return on their investment.

Variable annuities have other features and benefits, including death benefits, should someone die prematurely.

Investors should be thoroughly familiar with these features and benefits before agreeing to purchase a variable annuity. They also should be aware of the fees and other charges that typically come with variable annuities.

What can go wrong with a variable annuity?

Like many other financial products, an investor in a variable annuity takes on the risk that the investment might not pay off. If the institution invests annuity funds into products that perform poorly, an investor may not even get back what they paid into an annuity.

Sometimes, this is just economic reality. However, in too many cases, a financial professional may have a legal responsibility for an investor’s losing money on an annuity.

For example, the seller of the annuity may have failed adequately to warn the investor about the risk. A financial professional also may not have explained how the annuity would work and what would happen if the investments performed poorly.

Finally, a variable annuity is not the right product for all investors. Financial professionals may be liable if they recommended a variable annuity when it was too risky of an investment for their clients’ situation.