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Variable Annuities and the 4 Potential Reasons to Stay Away

Jun 17, 2008
One of the riskiest ventures is investing your money in the stock market. But along with the extreme risk involved, is also has the potential to make you a lot of money. In fact, investing in the stock market can turn out to be one of the most profitable business decisions you'll ever make if done right.

With so many variables to consider, it is expected that you may have hesitancy to risk your hard-earned cash on a speculative venture in the stock market. The best course of action is to hire a reputable stockbroker to handle your stocks in the beginning. A trained stockbroker can give you dependable stock tips and solid professional advice.

Another good idea is to discuss stocks with an associate or friend with a bit of experience investing in the market themselves. Talking with educated friends and acquaintances can be a good way to get stock advice and knowledge for free.

A well-known stock move is investing in variable annuities using the premium of your insurance. Variable annuities are actually insurance contracts that allow you to invest your premium in mutual fund type investments. While this may seem like a good idea, when you review it more closely, it might be a poor investment.

Here are 4 reasons why:

1. Early withdrawal penalties can cost you a double penalty. When you withdraw your profits, you will be penalized because insurance plans are designed for retirement. When you take money from your premium, it costs you in penalties to the government and to the insurance company itself.

2. The death benefit affects the people you leave behind. If the stocks you hold are down when you die, your beneficiaries receive as much of the investments as you put in. If stocks are up when you die, they are taxed as regular income.

3. Smaller taxes are paid on ordinary investments in mutual funds and stocks which qualify for low capital gains treatment. The gains from investing in premiums, however, are taxed immediately upon withdrawal.

4. When you buy annuities with insurance features, they are actually more costly than regular mutual funds. When an annuity has more insurance features, there are annual fees heaped on top of it. The result is a loss of profits for you.

Another thing to keep in mind is that timing is a key element to successful stock investing. There are specific times that are good to invest and other times that are poor. During times of hardship or national duress, the prices of stocks may be driven down to a discounted rate, but there is no reassurance that such stocks will recover to realize a significant profit. Educating yourself on the company is key in this situation.

The bottom line with regards to investing in the stock market is diversification. The best decision is to diversify where and when you invest your money so you can always realize some type of profit to offset potential losses.

And you should always hire a reputable finance professional to help guide you through the stock market.
About the Author
For more information on the problems with annuities -- including a growing collection of stock investing tips, strategy and advice -- visit: http://stockinvesting101.net
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