Variable Annuities

Variable annuities give you the opportunity to grow your future income while also offering options (for an additional cost) to help protect against market downturns and enjoy protected monthly income for life.

A variable annuity is a type of annuity whose value is tied to the performance of an investment portfolio. Payments from variable annuities can increase if the portfolio performs well and decrease if it loses money. Although variable annuities carry the potential of higher returns than fixed annuities, they don’t offer a guaranteed payout.

What is a Variable Annuity & How Does it Work?

A variable annuity is a contract between you and an annuity provider, usually an insurance company, in which you purchase the ability to receive a stream of income for your life or a set period.

When you purchase a variable annuity, the money you pay is allocated to an investment portfolio. You will have several options for investing the funds in your portfolio. These options, or subaccounts, can include stocks, bonds, money market funds, stable income value mutual funds and other investments. The amount of income you receive will rise or fall, depending on the performance of the portfolio.

You may be able to transfer your money among subaccounts. However, the annuity provider may charge a transfer fee. Along with mutual funds and other investments, you may be able to invest part of your money into a fixed account, which earns a fixed rate of interest and isn’t tied to the stock market.

Usually, the annuity company guarantees return of premium (ROP), which means that you won’t lose your initial investment. But if your portfolio doesn’t perform well, you may not earn any growth. On the other hand, if your portfolio performs well, you have the potential for greater gains. This differs from a fixed annuity or indexed annuity, which features a pre-set or minimum interest rate that doesn’t depend on the performance of investments.

Should I get a Variable Annuity?

Variable annuities are a good fit for people seeking a more significant potential payout than a fixed annuity or indexed annuity offers, and who isn’t afraid to take on market risk.

Variable annuities can help diversify your retirement investments and grow your money tax-deferred. It can be an excellent option if you already maxed out on your yearly 401(k) contributions.

Accumulation and Payout Phases

With a deferred variable annuity, there will be two phases: An accumulation phase and a payout phase. With deferred annuities, you begin receiving income payments at a later date. If your variable annuity is structured as an immediate annuity, there is no accumulation phase.

During the accumulation phase, your contract can increase in value. You make an initial deposit or contribution to purchase the annuity. You can specify how you would like to invest your funds. Variable Annuities generally have the highest fee structure as compared to Indexed or fixed annuities. Before deciding how to invest your money, you should carefully examine the prospectuses and discuss them with our financial advisor to explore your options.

With some variable annuities, you also have a choice of investing your money in a fixed-interest account. That interest rate may change, but you typically will have a guaranteed minimum interest rate.

If your contract allows, your survivors will receive all or some of your annuity’s value if you die during the accumulation period.

During the payout phase, also known as the distribution phase, you may receive your funds and any gains either as a lump-sum or as a stream of payments. You can designate how long the payments will last. They may be for a period of years or an indefinite period, such as your life or the lives of you and your spouse or beneficiary.

Depending on your contract, you may also be able to select fixed payments or adjustable payments that will change, depending on the performance of your investment portfolio.

Variable Annuity Pros and Cons

As with any investment, the benefits and risks of variable annuities should be weighed when considering whether to invest. These annuities carry the promise of higher returns than fixed annuities, but they also come with risks that warrant caution.


  • Possible Inflation hedge: If your investment portfolio performs well, you have the potential to see an increase in your payments, enabling you to better keep up with inflation.
  • Tax deferral: You don’t pay taxes on earnings until you take the money out of the annuity.
  • Initial investment protection: Usually the annuity company will guarantee you will have access to the money you invested, even if you make no interest if your portfolio does poorly.
  • Death benefit: If you die before you start receiving payments, your beneficiary will receive a payout from the annuity company.
  • Payments for life: You have the option of receiving payments for the rest of your life, even if your portfolio performs poorly and you exhaust your principal investment. You may have to pay extra for this option.


  • No guaranteed return: Unlike fixed and indexed annuities, there is no guarantee that you will earn interest on your investment. 
  • Taxed as income: When you withdraw your money, the earnings are taxed as income, for qualified accounts such as 401k, 403b, etc.
  • Complexity: Because they can be complicated, some investors may become confused about the provisions of variable annuities. 
  • Surrender charge: If you take some or all of your money out of your annuity earlier than the contract allows, you will have to pay a surrender or withdrawal charge. This charge can be as high as 10 percent early in the contract. 
  • Mortality and expense risk charge: This is the charge to cover guaranteed death benefits, guaranteed income for life or guaranteed caps on administrative charges. These fees can be 1.2 percent or more a year.
  • Administrative Fees: These cover record-keeping and other administrative costs.
  • Sales commission: The agent who sold you the annuity may receive compensation for the sale which most likely comes out of the principle or premiums paid. 
  • Underlying fund expenses: These cover expenses of the subaccounts in which your money is invested. This can be more than 1 percent a year.

Comparing Variable and Fixed Annuities

Predictability and risk are the biggest differences between variable and fixed annuities.

Fixed annuities share similarities with bank certificates of deposit (CDs). You deposit a sum of money, and the insurer agrees to pay a certain interest rate over a specified period. Because of their predictable nature, fixed annuities are considered less risky than variable annuities.

Unlike variable annuities, money in a traditional fixed annuity grows at an interest rate set by the insurance company. It doesn’t expose an investor to the stock market.

Fixed index annuities, which track a market index like the S&P 500, offer some market exposure while still providing protection against the risk of loss.

In contrast, a variable annuity functions more like a mutual fund. You invest in one or more subaccounts, which hold stocks, bonds, or a combination of both.

Variable annuities come with greater short-term volatility. Your money fluctuates with the broader markets, and your returns can vary.

Unlike a fixed annuity, variable annuities don’t offer any guaranteed return on your principal investment. But some investors are willing to take on this risk for greater potential returns.

A variable annuity may be a good option if you have a longer time horizon and higher risk tolerance.

Keep in mind that variable annuities often come with higher expenses and fees than fixed annuities. Make sure you understand the limitations and penalties of any annuity before signing a contract.

Lifetime Annuities

These are annuities that guarantee an income stream for the annuity holder’s lifetime. In some cases, lifetime annuities allow for a beneficiary to receive payments after the annuitant’s death. With these annuities, the amount of the payment will be set based on the health and age of the annuity holder. The longer the person is expected to live, the lower the individual payments are likely to be. This is because the payments are likely to continue longer for younger, healthier people.

Fixed-Period Annuities

An example of a fixed-period annuity, also known as a term-certain annuity, where the annuity owner can elect to receive their payments over a fixed period, typically 20 or 30 years. With these annuities, the age and health of the annuity holder do not affect the amount of the payments.

Frequently Asked Questions

Can you lose money in a variable annuity?

Yes, because variable annuities are tied to the stock market, you can lose money in a variable annuity. 

What is a group variable annuity?

A group variable annuity contract is a vehicle for companies that offer 401(k) and other retirement plans. These contracts are offered by insurance companies and are alternatives to mutual fund plan providers.

Who should buy a variable annuity?

People with the objective of capital appreciation and higher risk tolerance should buy variable annuities. These products are not suitable for people close to retirement or those who want guaranteed income.

About Variable Annuities

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