Choosing a Variable Annuity

Choosing Var AnnuityIf you’ve already decided that a variable annuity could make sense for your financial situation and retirement goals, you might be wondering where to go from here. How do you make sense of the options when there are so many features to choose from?

This brief guide will give you some basic information about the characteristics of variable annuities to help get you started. Please note that this document is intended for informational purposes only and isn’t exhaustive: for help selecting a specific variable annuity contract, consider speaking to a financial advisor about your individual retirement goals and financial needs.[1]

Key features

First, it’s helpful to understand some of the characteristics of variable annuities. There are 3 key features that we would like to discuss — we’ll go through some of the important details about each later on.

  • With a variable annuity, you are able to select and retain control of the investments that underlie your annuity.
  • The annuity will provide regular payouts to you for a pre-determined period of time (often your lifetime, but other options are typically available). Some variable annuities begin paying immediately, while others are deferred, meaning that payments start at a defined date in the future.
  • Any growth in your account is tax-deferred. Once the annuity begins making payments, you’ll pay taxes on the income you receive at your normal income tax rate.

Variable annuities are long-term investments designed to help investors reach their retirement goals. They’re not suitable as short-term investments.

Understanding your investment options

Because variable annuities allow you to manage your underlying investments yourself, you should have an understanding of your investment options and their cost. Take a look at the prospectus provided by your insurer. This document provides information about available mutual funds, their risk and return profiles, and the cost of each.

Investing within a variable annuity involves risk, so be sure to understand the risks posed by the investments you’re considering. It’s also important to consider your annuity portfolio in the context of your overall financial plan.

04.14.2016 Choosing Var Annuity REWRITE Infographic (2)

Payout terms

Your variable annuity might be designed to start paying immediately or after a pre-determined amount of time. In either case, you’ll receive income based on your original annuity purchase payments plus any investment income and gains.

Because you can participate in the growth of your investments, your payments could potentially grow along with your portfolio. However, if the markets go through a downturn, your payments might decrease and you could lose your principal. To mitigate this risk, some annuities offer a guaranteed minimum income payment, or life benefit, which ensures that your payments do not fall below a certain amount even if your account loses value. This might be a useful feature to you, though it may come at an additional cost.

With a variable annuity, you can also choose how often you’ll receive payments and how long they’ll last. For example, you might choose to receive monthly payments for your lifetime, or for your lifetime plus your spouse’s.  The right decision depends on your individual needs and preferences.

Death benefit and other features

Variable annuities often have a death benefit, which provides a lump sum payment to a beneficiary in the event of your death. The lump sum could be the amount remaining in your annuity account or an amount guaranteed by the insurer, depending on your contract terms.

You might also be able to choose a stepped-up death benefit, which might provide a higher minimum payment regardless of your account’s performance. When considering different options, take a look at the fees: a stepped-up death benefit may come at a higher cost than a standard one, and one insurer might charge more than another for the same benefit.

Some variable annuities also offer other additional benefits, such as long term care insurance coverage. Before making decisions about extras, take note of the specific benefits the variable annuity offers, the cost of each, and whether they make sense for your individual financial situation.

04.14.2016 Choosing Var Annuity REWRITE Info Image (3)

Surrender period

Most variable annuities charge a fee if you withdraw your money from the annuity within a certain period of time. Generally, any surrender charges are quoted as a percentage of the amount withdrawn, and the cost of withdrawal declines steadily over several years (typically 5 to 7).

Consider the surrender period in your potential variable annuity contract and make sure that it works with your long-range financial planning and retirement goals. The surrender period is part of what makes variable annuities more appropriate for long-term investors, so it’s important to have a firm understanding of your individual time horizon.

Closing thoughts

Variable annuities offer control and participation in investment growth while still providing regular income, but due to the risks and costs involved they’re considered a long-term investment. Some of the risks can be mitigated with guaranteed income benefits or other optional features and benefits. While these could be complementary to your retirement income plan, it’s important to note that any additional benefits will likely come at a cost.

Take the time to consider the terms and characteristics of your variable annuity, including the surrender period, payout terms and conditions, additional benefits, and charges. This could help you to make comparisons across your options to find the right contract for your individual retirement goals and financial planning needs.

If you’re unsure about whether to purchase an annuity or have questions or concerns about a particular contract, you might want to consider speaking to a financial advisor. Variable annuities can be a useful tool in retirement income planning if utilized and deployed correctly. Thus, can help to speak to someone who will be able to work with you in strategizing for your retirement income needs and goals.

Act Today!

We can discuss this topic and more in person at a complimentary appointment. As a bay area retirement specialist we can give you a review and make suggestions based on your retirement objectives.

1 All variable annuity information from the US Securities And Exchange Commission. “Variable Annuities: What You Should Know.”


The information presented in this article is general in nature and not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.
The guarantees of an annuity contract, including fixed returns, payouts, and death benefit guarantees are contingent on the claims-paying ability of the issuing insurance company.
Riders are optional, come at an additional cost and are often subject to specific restrictions and limitations.
Annuity withdrawals are taxed as ordinary income and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 591⁄2. Surrender charges may also apply during the contract’s early years.
Variable annuities are investments and are subject to market risk, investment risk, and possible loss of principal. Variable annuities may have higher internal fees associated with the product.
Variable annuities are sold by prospectus. Variable annuities contain fees and charges including, but not limited to mortality and expense risk charges, sales and surrender (early withdrawal) charges, administrative fees and charges for optional benefits and riders. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.