Variable Annuities
Market-linked retirement products with growth potential and insurance benefits
What is a Variable Annuity?
A variable annuity is a retirement product that combines investment opportunities with insurance features. Unlike fixed annuities, which provide guaranteed returns, variable annuities allow you to invest your premium in a selection of mutual funds (called "subaccounts") with varying risk levels and growth potential.
Your investment grows tax-deferred, meaning you don't pay taxes on gains until you make withdrawals. The value of your annuity will fluctuate based on the performance of your chosen investments, offering the potential for higher returns than fixed options—but also introducing market risk.
What makes variable annuities unique is their combination of investment opportunity with insurance benefits, such as guaranteed death benefits and optional features that can provide income guarantees—though these come with additional costs.
Key Variable Annuity Features
- Investment Choice: Select from a range of investment options with different risk-return profiles
- Tax-Deferred Growth: No taxes on earnings until you withdraw your money
- Death Benefits: Guarantee your beneficiaries receive at least your original investment
- Optional Income Guarantees: Add riders for lifetime income guarantees (at additional cost)
- Unlimited Contributions: No IRS limits on how much you can invest annually
Is a Variable Annuity Right for You?
Variable annuities may be suitable if you:
Have maxed out contributions to other retirement accounts
Seek tax-deferred growth with higher return potential
Have a longer investment horizon (10+ years)
Value death benefits or optional income guarantees
May not be ideal if you:
Need access to your money in the near term
Are highly fee-sensitive or cost-conscious
Have a low risk tolerance or are near retirement
How Variable Annuities Work
Understanding the structure and lifecycle of a variable annuity
Purchase
You purchase a variable annuity contract with either a lump sum payment or a series of payments over time. The money goes into a general account at the insurance company.
Investment Selection
You allocate your premium among various investment options (subaccounts) offered within the annuity, which typically mirror mutual funds with different investment objectives and risk profiles.
Accumulation Phase
Your investment grows tax-deferred based on the performance of your chosen subaccounts. During this phase, you can usually make changes to your investment allocations as needed.
Distribution Phase
When you're ready to receive income, you can annuitize the contract (convert to a guaranteed income stream) or take withdrawals as needed while keeping the account invested.
Key Components of Variable Annuities
Insurance Components
- Death Benefits: Guarantees that your beneficiaries receive at least your original investment or a higher stepped-up value if applicable
- Living Benefit Riders (Optional): Additional features that can provide income guarantees, principal protection, or other benefits
Investment Components
- Subaccounts: Investment options similar to mutual funds that span various asset classes (stocks, bonds, etc.)
- Fixed Account Option: Most variable annuities also offer a fixed interest account option for more conservative allocations
Fee Structure
- Mortality & Expense Risk Charges (M&E): 1.00%-1.50% annually to cover insurance guarantees
- Administrative Fees: 0.10%-0.30% annually for contract maintenance
- Investment Management Fees: 0.50%-2.00% annually for the underlying subaccounts
- Optional Rider Fees: 0.50%-1.50% annually for each optional benefit rider
Fee Impact Calculator
See how fees can affect your variable annuity's growth over time
Optional Benefit Riders
Customizable insurance features that can enhance your variable annuity
Guaranteed Minimum Income Benefit (GMIB)
Guarantees a minimum level of lifetime income regardless of how your investments perform. This ensures you'll receive at least a specified income amount when you annuitize, even if market downturns have reduced your account value.
Typical Cost: 0.5% to 1.5% of contract value annually
Guaranteed Minimum Withdrawal Benefit (GMWB)
Allows you to withdraw a certain percentage of your total investment annually (typically 4-7%) until you've recovered your entire principal, regardless of market performance. Some versions provide withdrawals for life.
Typical Cost: 0.75% to 1.5% of contract value annually
Guaranteed Minimum Death Benefit (GMDB)
Enhanced death benefits that guarantee your beneficiaries receive the greater of your account value, your total contributions, or a stepped-up value (such as the highest anniversary value of your account).
Typical Cost: 0.25% to 0.75% of contract value annually
Guaranteed Minimum Accumulation Benefit (GMAB)
Ensures your account value will be at least equal to your original investment (or another guaranteed amount) after a specified period, typically 10 years, regardless of investment performance.
Typical Cost: 0.5% to 1.25% of contract value annually
Important Note About Riders
While these riders provide valuable guarantees, they add to the overall cost of your annuity. Each additional rider fee reduces your net investment return, which can significantly impact long-term growth. Carefully consider which guarantees are most important to you and whether the cost is worth the benefit for your specific situation.
Frequently Asked Questions
Common questions about variable annuities
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