A variable contract is an agreement between two parties in which the terms of the contract are subject to change based on certain predetermined factors. These factors can include things such as the performance of stocks, interest rates, or other economic indicators.
Variable contracts are commonly used in the insurance industry, where they are often referred to as variable annuities. These contracts allow investors to receive a guaranteed income stream in retirement, while also giving them the potential to earn higher returns than traditional fixed annuities.
The key feature of a variable contract is the investment component. Investors can allocate their premiums towards various investment options, such as mutual funds or exchange-traded funds (ETFs). The value of these investments will fluctuate based on market conditions, and the investor`s returns will depend on how their investments perform.
The investment component of a variable contract also creates some additional risks for the investor. Unlike traditional fixed annuities, where the insurance company assumes all investment risk, investors in variable contracts are responsible for managing their own investments. If their investments perform poorly, they may receive lower returns or even lose money.
To mitigate some of these risks, variable contracts often come with certain guarantees. For example, many contracts offer a guaranteed minimum income benefit (GMIB), which promises that the investor will receive a minimum level of income regardless of how their investments perform. Other contracts may offer a guaranteed minimum death benefit (GMDB), which ensures that the investor`s heirs will receive a certain amount of money if they pass away before the contract expires.
Variable contracts can be complex financial instruments, and it`s important for investors to thoroughly understand their features and risks before investing. It`s also important for investors to carefully consider their investment goals and risk tolerance, as well as the fees and expenses associated with the contract, before signing on the dotted line.
In conclusion, a variable contract is an agreement between two parties where the terms of the contract are subject to change based on certain factors such as the performance of stocks or interest rates. These contracts are often used in the insurance industry to provide investors with a guaranteed income stream in retirement while also giving them the potential to earn higher returns than traditional fixed annuities. However, investors should thoroughly understand the risks and fees associated with variable contracts before investing.