What is a Variable Annuity?

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Variable annuities can seem complicated. In this short primer, we’ll introduce some of the key features of variable annuities so that you can begin to get an understanding of whether or not this is an investment that’s right for you.

A variable annuity is a contract between you and an insurance company. In exchange for an upfront payment, the insurance company will provide payments to you in the future. The payments you receive from a variable annuity may vary depending on market returns, making variable annuities an investment.

With a variable annuity, you are able to participate in the growth of your account by allocating your upfront payment among different investment options in what are known as sub-accounts. Your eventual annuity income will reflect the performance in the account.

These characteristics do come with risks, however (more on that below).

Variable annuities come with tax and other potential benefits. Any earnings on investments in a variable annuity will accumulate on a tax-deferred basis, so that you’ll only pay income taxes once your annuity starts paying out. Your variable annuity may also offer death benefits, which offer a payout out to family in the event of your death. Life benefits can be used to protect the amount of annuity income you receive.

Who is it for?

Variable annuities can be useful for investors with a long-term time horizon who want to supplement their retirement income.

A variable annuity can provide the flexibility and control of selecting the investments within the sub-accounts. Variable annuities can be part of an appropriate retirement income-planning strategy. Having a planned income can help you with budgeting, savings, and determining an appropriate draw-down rate from your retirement accounts.

There are limited contribution limits for an annuity. That means you can take advantage of tax-deferred growth on a large sum at one time. However, it’s important to note that investing large amounts in an annuity will affect your liquid net worth due to potential withdrawal penalties.

When considering whether a variable annuity is right for you, it’s important to have an understanding of your overall financial picture. Your age, income, current and future financial needs, investment objectives, and time horizon are all important factors to consider. For example, if there’s a chance you’ll need to access your investment in the next few years, a variable annuity might not be right for you.

What is Annuity Info ImageWhat are the risks?

There are risks to investing in a variable annuity.

With a variable annuity, your eventual income is tied to the performance of your account. If your investments grow, your annuity income could rise. If your investments fall, your annuity income could be reduced.

However, if you’re uncertain about whether you have the appropriate time horizon and risk tolerance to invest in a variable annuity, it’s a good idea to speak with an advisor.

It’s also important to note that there are fees associated with variable annuities. These fees may reduce the performance of your investments. Most annuities charge additional fees if you withdraw your principal before a pre-determined time (typically 5 to 7 years), which means that variable annuities are generally better-suited for investors with a longer time horizon. Similarly, some benefits might only be available if the contract is maintained for a specific period of time.

Finally, make sure to research the annuity company you choose. Any guarantees built into your annuity are contingent on the insurance company’s ability to pay them. In other words, because the stability of your payments depends on the stability of the insurer, you may want to consider working with a company that has a strong track record and a solid credit rating.

Where do I go from here?

A variable annuity can be a useful retirement planning tool, but it’s important to ensure that it’s a suitable investment for you. If you’re considering a variable annuity, take your time and investigate the benefits, fees, and restrictions involved with each potential contract.

If looking for help in making a decision, talking to an advisor about your retirement goals can help.

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.


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.
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 59 1⁄2. 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.